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THE  SCIENCE  AND  PRACTICE 
OF  AUDITING 


•-  •  >    » 


COMPILED  BY 

E.  H.   BEACH    AND  W.  W.  THORNE 


AUTHORS  OF  THK 


AMERICAN  BUSINESS  AND  ACCOUNTING 
ENCYCLOPEDIA 

AND  OTHER  STANDARD  TEXT  BOOKS 


PRICE,  ONE  DOLLAR 


The  Book-Keeper  Publishing  Co.,  Ltd. 

DETROIT,  MICH..    U.  S.   A. 
1903 


^3 


Entered  according  to  Act  of  Congress, 
in  the  year  1903,  by 

The  Book-Keeper  Publishing  Company,  Limited 
Detroit,  Michigan 

In  the  office  of  the  Librarian  of  Congress. 
All  rights  reserved. 


The  Science  an4  Practice  of  Auditing* 


A  large  amount  of  literature  on  the  subject  of  auditing,  its  proper  scope, 
methods  of  procedure  in  special  cases,  responsibility  of  auditors,  etc.,  has 
been  produced  of  recent  years,  and  the  field  is  so  wide  on  account  of  the  spe- 
cial  conditions  prevailing  in  different  kinds  of  businesses  that  it  would  be  an 
easy  matter  to  compile  a  book  of  several  hundred  pages  and  by  no  means 
exhaust  the  subject. 

In  this  text  book  we  will  endeavor  to  give  general  and  comprehensive 
directions  for  the  study  of  those  who  desire  to  become  familiar  with  the 
requirements  of  this  kind  of  expert  work,  and  to  give  our  readers  an  idea 
how  they  should  arrange  their  plans  in  order  to  obtain  the  best  results. 

GENERAL   DUTIES. 

The  general  duties  of  an  auditor  may  be  defined  as  follows : 

First. — The  audit  of  accounts,  entailing  such  examinations  as  will  sat- 
isfy him  that  the  accounts  placed  before  him  are  substantially  correct  and 
enable  him  to  certify  to  this  effect. 

Second — The  investigation  of  frauds. 

Third — The  investigation  of  the  accounts  of  firms  and  companies  with! 
a  view  to  certifying  the  profits  or  verifying  the  assets  and  liabilities  on  con- 
version of  the  same  into  public  or  private  corporations,  either  by  sale  or  by 
the  consolidation  of  several  concerns  into  one  large  corporation. 

Fourth — The  investigation  of  claims  for  compensation. 

GENERAL  PROGRAM  OR  AUDITING  PLAN. 

The  following  instructions  for  the  audit  of  an  ordinary  set  of  books 
are  those  used  by  many  Public  Accountants : 

Check  all  postings — or  at  least  all  postings  of  the  Cash  Book,  and  all 
postings  into  the  Nominal  and  Private  Ledgers. 

Vouch  Cash  Book  and  Petty  Cash  Book. 

Check  additions  thereof,  and  verify  balances  at  bank  and  in  hand. 

Check  Ledger  balances  and  additions  of  all  Ledgers;  and,  where  the 
whole  of  the  postings  are  not  checked,  compare  the  balances  of  each  Ledger 
with  the  corresponding  Adjustment  Account. 

Complete  and  agree  Trial  Balance. 

8 


From  the  Trial  Balance  so  completed,  check  the  Trading,  Profit  and 
Loss,  and  Balance  Sheet,  so  far  as  their  arithmetical  accuracy  is  concerned. 

Verify  the  existence  of  all  assets. 

See  that  the  values  at  which  they  are  taken  into  the  Balance  Sheet  are 
reasonable/  and  that  .proper  allowance  has  been  made  (where  necessary)  in 
respect  of  'depr'td^tibn,  bad  debts,  and  discounts. 

:  ,  I/pqrf.'the  lial^Uities  side,  see  that  ^'statements"  have  been  procured  in 
respect  of  each  trade  creditor's  account,  and  that  they  agree  with  the  balances 
shown  in  the  Purchase  Ledger. 

Carefully  scrutinize  all  sundry  outstanding  liabilities,  with  a  view  to  see- 
ing that  everything  has  been  included. 

Enquire  what  reserve  is  necessary  in  respect  of  liability  on  bills  dis- 
counted. 

Inspect  bills  receivable  in  hand  and  check  with  Bills  Receivable  Account. 

Check  the  extensions  and  additions  of  Inventory,  or  see  that  these  have 
been  properly  and  thoroughly  done  and  that  the  stock  has  been  certified  by 
responsible  persons  to  have  been  actually  in  existence  at  the  date  of  the  Bal- 
ance Sheet,  and  to  have  been  taken  at  cost  price  or  under. 

Carefully  compare  every  item  in  the  Balance  Sheet,  Trading  and  Profit 
and  Loss  Accounts  with  the  corresponding  item  at  previous  periods. 

CONDENSED  AUDITING  SYSTEM. 

A  very  complete  and  practical  plan  of  auditing  is  described  under  this 
heading  in  the  American  Business  and  Accounting  Encyclopaedia,  page  133. 

The  following  special  points  should  be  carefully  considered  and  will  be 
found  of  value  to  the  intending  auditor : 

PETTY  CASH. 

Separate  vouchers  should  be  required  for  petty  disbursements.  This 
cannot,  however,  always  be  obtained,  in  which  case,  the  Petty  Cash  Book 
should  be  signed  by  some  responsible  official  to  indicate  that  he  accepts  the 
responsibility  for  the  accuracy  of  that  portion  of  the  books. 

CASH   SALES. 

The  auditor  should  always  recommend  the  use  of  consecutively  num- 
bered counterfoil  or  stub  cash  receipt  books,  as  where  these  are  used  any 
missing  or  blank  stubs  at  once  indicate  that  an  explanation  is  required. 

CASH   DISCOUNTS. 

The  entry  of  cash  discounts  should  be  carefully  scrutinized,  but  it  is  not 
always  possible  to  check  the  discounts  on  account  of  the  volume  of  work 
involved.  In  such  cases  certain  deductions  for  cash  discounts  should  be 
selected  for  examination  at  various  intervals. 


COLUMNAR  CASH   BOOKS. 

In  columnar  cash  books  it  is  very  important  that  the  auditor  should 
satisfy  himself  that  all  amounts  have  been  entered  in  the  proper  columns. 
For  example:  a  remittance  on  account  to  a  travelling  salesman  would  be  a 
complete  loss  to  the  company  if  entered  in  the  General  Expense  column. 

VOUCHERS. 

Where  vouchers  are  missing  it  is  considered  satisfactory  to  accept  the 
return  check  as  the  voucher. 

ACCOUNTS  RECEIVABLE  AND  PAYABLE. 

A  complete  audit  would  undoubtedly  include  the  checking  of  all  post- 
ings in  Accounts  Receivable  and  Payable  Ledgers.  Where  this  cannot  be 
done  the  general  accuracy  of  the  books  should  be  arrived  at  by  an  indepen- 
dent adjustment  account  consisting  of  the  total  debits  and  credits  obtained 
from  the  various  books  of  original  entry.  It  is  important  to  compare  the 
actual  invoices  with  the  entries  in  the  Purchase  Book,  and  these  invoices 
should  be  O.  K.'d  by  the  manager  of  the  department  or  other  responsible 
officer.  Where  regular  audits  are  performed  it  is  considered  best  that  the 
secretary  of  the  company  should  keep  the  private  ledger  containing  adjust- 
ment accounts. 

Accounts  in  the  Purchase  Ledger  may  also  be  verified  by  calling  for 
statements  from  trade  creditors. 

DOUBTFUL  AND  BAD  DEBJS. 

The  auditor  should  endeavor  to  ascertain  that  bad  and  doubtful  debts 
are  not  included  with  good  accounts  receivable.  Some  accountants  make  a 
schedule  of  accounts  receivable  ruled  with  several  money  columns,  each  debt 
being  entered  in  one  of  these  columns  according  to  the  length  of  time  it  has 
been  standing  on  the  books.  A  special  report  should  be  made  in  regard  to 
this  feature  of  the  audit.  It  is  also  customary  to  obtain  from  the  officers 
of  the  business  a  certificate  that  all  bad  debts  have  been  written  off  and  suf- 
ficient reserve  made  for  doubtful  debts.  Where  a  separate  Suspense  or  Bad 
Debt  Ledger  is  not  used  it  should  be  recommended. 

Doubtful  debts  are  usually  taken  in  the  Balance  Sheet  at  5©%.    It  is  a 

good  plan  to  open  a  reserve  for  bad  debts  account,  crediting  this  account 

with  an  amount  which  corresponds  with  the  percentage  of  ascertained  loss 

on  total  sales  of  previous  years.    Losses  thereafter  occurring  are  charged 

against  this  account. 

'^''house'"  expense. 

In  some  businesses  it  is  the  custom  to  furnish  fixtures,  tools,  and  ma- 
chinery, out  of  stock,  or  to  have  them  made  on  the  premises,  these  items  being 


charged  as  ordinary  transactions  in  the  course  of  business.  In  cases  of  this 
kind  it  must  be  seen  that  such  items  are  charged  at  cost  and  credited  to  Pur- 
chase Account  and  not  to  Sales  Account.  This,  of  course,  refers  to  the 
material  used. 

REPAIRS  AND  RENEWALS. 

Charges  to  plant  and  machinery,  fixtures,  etc.,  must  be  examined  to  see 
that  nothing  in  the  way  of  repairs  or  renewals  has  been  included. 

TRADING   ACCOUNTS. 

In  making  up  the  Trading  Account  the  auditor  must  be  careful  to  in- 
clude only  such  items  as  belong  or  add  to  the  cost  of  article  or  product.  All 
other  items  must  be  included  in  the  Profit  and  Loss  Account. 

RESERVES. 

Reserve  accounts  should  be  carefully  distinguished  in  the  balance  sheet 
from  reserve  funds. 

SECRET  RESERVES. 

Secret  reserves  are  created  by  writing  down  assets  below  their  real 
value,  such  as  plant,  machinery  and  inventory  in  a  commercial  business,  and 
freehold  premises  and  securities  in  the  banking  business.  It  would  be  the 
duty  of  the  auditor  to  report  to  the  directors  in  regard  to  reserves  of  this 
nature,  in  order  to  relieve  himself  from  responsibility. 

INVENTORIES. 

The  auditor  should  ascertain  the  basis  on  which  the  inventory  is  calcu- 
lated, i.  e.,  cost  or  selling  price,  as  it  sometimes  happens  that  managers  of 
branch  stores  endeavor  to  inflate  the  assets  on  hand  by  taking  an  inventory 
on  the  latter  basis.  Investments  in  stocks  and  bonds  should  be  carefully  ex- 
amined and  the  actual  market  value  determined  in  order  to  see  that  they 
have  not  been  overvalued  on  the  books. 

BILLS    RECEIVABLE. 

These  should  be  inventoried  by  the  auditor  and  agreed  with  the  Bills 
Receivable  Account.  Bills  discounted  should  also'  be  scheduled  and  the 
contingent  liability  shown  on  the  balance  sheet.  Worthless  bills  should  be 
transferred  to  the  Suspense  Ledger. 

BANK  ACCOUNT. 

It  is  well  to  obtain  a  certificate  from  the  bank  as  to  the  amount  standing 
to  the  credit  on  the  date  of  the  balancing.  A  reconciliation  statement  should 
be  a  part  of  the  auditor's  report. 

DIVIDENDS. 

The  auditor  must  be  careful  to  ascertain  that  dividends  have  not  been 
paid  from  capital. 

6 


LIST  OF   BOOKS. 

At  the  commencement  of  an  audit  it  is  necessary  to  make  a  list  of  the 
books  audited.  It  will  be  found  useful  to  keep  an  audit  note  book  which 
will  contain  the  list  of  books  examined  and  the  extent  of  examination  of 
each  audit. 

DEPRECIATION. 

The  American  Business  and  Accounting  Encyclopaedia  goes  very  thor- 
oughly into  this  subject.  In  some  cases  it  has  been  discovered  that  plant 
has  been  sold  and  credited  to  sales.  The  only  way  of  insuring  against  con- 
ditions of  this  kind  is  by  a  re-valuation.  The  usual  rate  of  depreciation  on 
ordinary  plant  and  machinery  used  in  manufacturing  businesses  is  from  7J^ 
to  123^  %  per  annum.  Unsalable  stock,  of  course,  depreciates  in  value  until, 
sometimes,  it  is  absolutely  worthless,  and  is  therefore  best  for  the  auditor 
to  accept  no  responsibility  for  the  valuation  of  stock  in  trade.  He  should  re- 
quire the  managers  of  the  departments  to  certify  to  the  correctness  of  the 
inventories.  ^ 

The  customary  depreciation  on  boilers  is  from  10  to  15%  per  annum,  ^s 
they  wear  out  rapidly.  On  furniture  and  fixtures  it  is  usual  to  deduct  from 
5to7j4%. 

CONTINGENT    LIABILITIES. 

These  may  include  notes  and  drafts  discounted  or  transferred,  accom- 
modation obligations,  disputed  claims  either  way,  unpaid  cumulative  divi- 
dends, unpaid  rent,  etc. 

PARTNERSHIP   AGREEMENTS. 

In  auditing  the  accounts  of  a  partnership  it  is  necessary  for  the  auditor 
to  carefully  examine  the  partnership  deed  for  the  purpose  of  ascertaining 
the  various  agreements  which  will  control  the  interests  of  the  partners. 

CORPORATION  STOCK  AND  BY-LAWS. 

In  corporations  it  is  the  duty  of  the  auditor  (unless  appointed  to  audit 
the  accounts  for  a  certain  specified  time)  to  ascertain  that  all  subscriptions 
for  stock  have  been  properly  accounted  for  and  that  no  regulations  affecting 
the  financial  management  of  the  corporation  have  been  violated. 

FICTITIOUS    ASSETS. 

It  is  considered  that  s^uch  items  as  stock  discount,  bonus,  promotion  and 
organization  expenses  should  be  written  off  in  not  less  than  four  years. 

CHECK    MARKS. 

All  vouchers  for  payments  should  be  either  initialed  by  the  auditor,  or 
stamped  with  a  special  "audited"  stamp,  so  as  to  render  it  impossible  for  the 
same  voucher  to  be  produced  twice. 


.  RESPONSIBILITY  OF  AUDITOR. 

It  is  difficult  to  exactly  fix  the  responsibility  of  an  auditor,  as  it  may  be 
possible  that  some  of  the  Accounts  Receivable  may  be  non-existing,  owing 
to  their  having  been  collected  and  the  amounts  embezzled.  The  inventory 
may  be  inaccurate  and  contain  lists  of  articles  which  are  not  in  the  possession 
of  the  business.  These  are  serious  matters  when  businesses  are  being  investi- 
gated on  the  part  of  an  intending  purchaser,  or  when  defalcations  are  sus- 
pected. In  such  cases  the  auditor  should  send  statements  to  all  customers 
requesting  a  verification  of  the  balances  shown  thereon.  An  independent 
valuation  of  the  assets  should  also  be  made. 

PAR.   3   OF   '^'gENERAL  J>UTIES.'' 

This  class  of  auditing  is  very  thoroughly  explained  and  discussed  in 
"Duties  of  Auditors  in  Relation  to  Corporation  Amalgamation,"  by  F.  H. 
Macpherson,  C.  A. 

Many  accountants  when  ascertaining  the  profits  of  a  business  for  the 
purpose  of  a  prospectus,  make  no  allowance  for  remuneration  to  a  partner 
or  partners  for  management. 

Suppose  the  capital  of  a  company  to  be  $100,000;  preferred  stock,  $60,- 
000;  common  stock,  $40,000 — $100,000.  And  suppose  the  business  to  have 
belonged  to  one  man  who  for  many  years  has  worked  energetically  and 
brought  it  to  the  state  at  which  it  has  been  floated.  Suppose  the  reported 
profits  to  be,  on  an  average,  $7,000  per  annum.  These  profits  may  continue 
to  be  earned  by  the  company  so  long  as  the  vendor  continues  to  manage  the 
business  as  he  was  doing  before  and  chooses  to  be  satisfied  with  his  dividend 
for  his  remuneration.  If,  however,  the  vendor  does  not,  after  two  or  three 
years,  choose  to  do  this,  the  company  must  find  and  pay  a  man  to  do  the 
work,  and  he  should  be  a  man  of  equal  standing  and  ability.  The  salary 
which  must  be  paid  will  form  a  first  charge  upon  the  assets  of  the  company, 
and  will,  of  course,  be  preferable  to  the  interest  on  the  preference  shares. 
The  new  man  at  the  helm  will  look  for  an  income  from  the  company  equal, 
at  any  rate,  to  what  is  being  earned  by  any  one  else  in  a  similar  position. 

In  a  company  with  the  amount  of  preference  stock  and  ordinary  stock 
referred  to,  it  may  not  unreasonably  be  supposed  that  with  that  salary  to  pay, 
the  time  may  come  when  there  will  be  no  dividend  on  the  ordinary  stock,  and 
when  there  may  not  be  sufficient  to  pay  the  full  dividend  on  the  preference 
stock.  The  credit  of  the  company  when  it  pays  no  dividend  on  its  ordinary 
stock,  and  is  unable  to  pay  a  full  dividend  on  its  preference  stock,  will  suffer 
very  considerably. 

This  appears  to  be  a  very  serious  defect  in  such  an  investigfation,  and  the 
auditor  should  make  provision  for  cost  of  management  in  certifying  amount 

8 


of  profits  earned,  or  state  conditions  clearly  in  his  report  so  that  intending 
purchasers  of  the  business  may  understand  them. 

TRUST  COMPANIES. 

The  auditing  of  a  Trust  Company  presents  distinctive  features  in  that 
the  auditor's  report  should  include  separate  statistics  in  regard  to  the  various 
trusts  administered,  and  a  report  showing  that  any  obligations  necessary  to 
keep  the  trusts  intact  have  been  duly  fulfilled  by  the  Trust  Company,  and  that 
the  properties  and  securities  held  in  trust  remain  in  the  possession  of  or 
under  the  control  of  the  Company. 

In  a  real  estate  trust  it  is  usual  to  make  an  Income  and  Expenditure 
account  one  of  the  principal  exhibits.  It  would  also  be  very  necessary  to 
show  that  all  payments  involved  in  the  administration  of  trusts,  such  as 
annuities,  pensions,  etc.,  have  been  duly  paid  when  due.  The  various  securi- 
ties and  investments  of  the  Company  must  be  listed  in  detail ;  a  schedule  of 
depositors  made  showing  amount  of  liabilities  to  them  at  date  of  audit,  etc. 

The  following  general  directions  will  be  found  instructive: 

The  auditor  first  takes  up,  for  example,  the  department  devoted  to  indi- 
vidual trusts  and  the  management  of  estates,  including  such  matters  as  exe- 
cutorships and  trusteeships  under  wills.  In  this  division  he  must  follow  out 
each  individual  trust  and  examine  it  on  the  merits  of  the  case  and  not  from 
the  standpoint  of  any  fixed  rule. 

Next,  for  example,  he  takes  up  the  question  of  administration,  and  in 
this  department  considers  the  company  from  the  standpoint  of  administrator, 
trustee,  guardian,  receiver  or  assignee,  as  the  case  may  be.  Here  again  each 
individual  undertaking  must  be  examined  from  beginning  to  end  in  order 
to  put  into  the  report  that  which  he  is  expected  to  present. 

Again,  he  takes  up  the  question  of  trusteeship  under  mortgage  issued 
by  corporations  or  municipalities.  Here  there  is  the  inquiry  alon^  specific 
lines  to  be  assured  that  the  company  is  not  making-  mistakes  and  is  not  abus- 
ing the  confidence  reposed  in  it. 

PUBLIC  INSTITUTIONS. 

The  following  would  be  a  good  scheme  of  audit  in  connection  with  the 
accounts  of  a  hospital  or  charitable  institution : 

Vouch  all  cash  received  and  paid. 

Trace  all  subscriptions  and  donations  received  on  to  the  published  list, 
and  compare  totals  thereof  with  the  totals  of  the  Ledger  Account. 

Vouch  legacies  by  comparison  with  the  letters  received  from  solicitors 
or  executors  enclosing  them. 

Vouch  all  payments,  paying,  careful  attention  to  the  fact  that  they  must 
have  been  properly  authorized  for  payment. 

9 


Check  additions  of  Cash  Book,  and  verify  balances  in  hand  and  at  bank, 
either  on  deposit  or  current  account. 

Verify  existence  of  investments  by  inspection  of  the  title  deeds,  certifi- 
cates, etc. 

Check  all  Ledger  postings  and  additions,  and  extraction  of  Ledger  bal- 
ances. 

Verify  Trial  Balance  and  check  therefrom  the  published  accounts,  also 
comparing  them  with  those  of  the  preceding  year. 

MINES. 

Where  land  for  the  development  of  mines  has  been  purchased  or  leased 
subject  to  royalty,  it  is  very  essential  to  ascertain  that  the  royalty  accrued 
due  has  been  paid.  The  auditor  should  also  satisfy  himself  that  the  whole 
output  of  the  mine  has  been  accounted  for.  The  stock  of  material  at  the 
pit's  mouth  should  be  valued  for  the  Balance  Sheet  at  cost  of  raising. 

BUILDING  SOCIETIES. 

It  is  very  important  to  call  in  all  depositors'  pass  books  and  to  compare 
them  with  the  accounts  shown  in  the  books. 


10 


DUTIES  OF  AUDITORS. 

BY  F.  H.  MACPHERSON,  C  A. 


THE  DIFFERENCE  BETWEEN  TRUSTS  AND  AMALGAMATIONS. 

It  is  not  my  purpose,  nor  was  it  the  intention  of  the  Council  of  the 
Institute  in  selecting  the  subject  for  this  evening's  paper,  that  I  should  enter 
into  a  dissertation  upon  the  merits  or  demerits,  the  good  or  ill  to  the  com- 
munity of  "Amalgamations,"  otherwise  known  as  "trusts,"  "combinations," 
and  "monopolies,"  or  if  the  terms  be  used  which  are  applied  to  them  by  those 
more  especially  and  directly  interested,  then  we  shall  speak  of  them  as 
"Judicious  combinations  for  the  public  good,"  "community  of  interest,"  or 
"community  of  control." 

Here  I  may  interject  that  the  difference  between  a  Trust  and  an  Amal- 
gamation has  been  thus  described:  "The  Trust  was  designated  primarily 
as  a  weapon  of  war,  aggression  and  attack ;  the  Amalgamation  is  primarily  a 
measure  of  self-defence  and  peace." 

Whether  the  objects  of  Amalgamation  are  desirable  or  the  reverse, 
is  not  with  us  the  question;  not  yet  whether  most  beneficial  to  the  com- 
munity or  to  the  individual.  There  are  two  sides  to  this,  as  to  every  other 
question.  All  will  agree,  however,  that  the  one  ultimate  end  and  aim  of 
those  who  enter  into  these  combinations,  by  whatever  name  they  may  be 
known,  is  a  desire  to  increase  profit.  This  increased  profit  may  be  brought 
about  in  numerous  ways,  as  by  command  of  the  necessary  capital;  the 
checking  of  .competition;  the  utilization  of  materials  which  manufacturers 
in  a  small  way  cannot  use,  in  the  manufacture  of  by-products ;  the  introduc* 
tion  of  new  and  labor-saving  machinery  whereby  the  cost  of  production 
is  materially  lessened;  the  saving  of  energy  whfch  comes  from  the  organ- 
ization of  a  large  business  under  a  single  skilled  executive  head ;  better  or- 
ganization; the  ability  to  retain  men  of  peculiar  abilities  upon  the  line  of 
work  for  which  they  are  specially  fitted ;  the  saving  of  expense  in  the  selling 
or  disposal  of  the  products ;  the  specializing  of  work — and  with  all  these,  as 
it  was  put  by  the  president  of  the  Standard  Oil  Company,  is  given  "power 
to  give  the  public  improved  products  at  less  prices  and  still  make  a  profit 
for  the  shareholders,"  and  to  provide  "permanent  work  and  good  wages 
for  labor." 

11 


COMBINATIONS  A   NECESSITY   OF   THE   AGE. 

In  this  age  of  progress  it  would  seem  that  combinations  have  become 
a  necessity.  This  being  admitted,  the  important  question  to  be  considered 
by  accountants  is  upon  what  basis  shall  these  amalgamations  be  effected, 
and  upon  this  subject  I  shall  to-night  endeavor  to  present  a  few  thoughts. 

'The  Investigation  of  Companies'  Accounts  wth  a  view  to  amalgama- 
tion.   How  to  do  this  and  what  the  Report  should  contain." 

For  the  purposes  of  this  paper  I  shall  change  the  order  of  the  sentence 
"How  to  do  this  and  what  the  report  should  contain,"  and  make  it  read: 
"What  the  report  should  contain  and  how  to  do  this,"  or,  the  requirements 
having  first  been  ascertained,  how  proceed  to  obtain  the  information  re- 
quired. 

STATUS  OF  THE  ACCOUNTANT. 

The  first  point  to  receive  consideration  is  the  position  of  the  accountant 
with  respect  to  the  extent  of  the  examination  which  he  is  called  upon  to 
make.  Usually  the  instructions  are  very  general  in  their  terms;  in  some 
instances,  however,  they  are  sufficiently  specific  as  to  leave  no  room  for  the 
exercise  of  any  discretion.  As  an  illustration:  Recently  I  was, asked  to 
make  an  investigation  of  two  concerns  (about  to  amalgamate)  for  the  pur- 
pose of  ascertaining  what  the  revenues  and  expenses  of  operation  of  the 
respective  properties  had  been  for  a  certain  period.  I  was  not  to  concern 
myself  with  the  matter  of  assets  and  liabilities.  The  value  of  the  former, 
and  the  sum  of  the  latter  had  been  arranged  as  between  the  parties  previous 
to  my  being  called  in  and  certain  statements  as  to  profits  had  been  made. 
My  sole  duty  was  to  verify  the  accuracy  of  these  statements  as  to  profits. 

RESPONSIBILITIES  OF  THE  ACCOUNTANT. 

In  "Dicksee  on  Auditing"  it  is  laid  down  as  an  axiom  that  "an  account- 
ant cannot  submit  his  professional  discretion  to  the  dictation  of  his  clients 
without  sacrifice  of  self-respect,  and  grave  danger  to  his  clients'  interests." 
This  is  a  sound  principle  and  one  which  it  is  very  desirable  should  be  adhered 
to.  In  the  great  majority  of  the  certificates  of  accountants  which  are  found 
in  the  prospectuses  of  companies  forming  to  effect  amalgamations  is  a  bare 
statement  as  to  profits  covering  a  period  of  years,  not  of  the  several  com- 
panies individually,  but  in  the  aggregate.  Each  time  that  I  see  a  certificate 
framed  after  this,  the  prevailing  fashion,  the  thought  occurs  to  me  that  the 
accountant  is  probably  carrying  out  his  instructions,  and  is  telling  the  truth 
in  a  concrete  form.  But  is  the  whole  truth  being  told?  For  it  is  possible 
for  the  accountants  to  tell  the  truth  and  yet  not  give  expression  to  the  whole 
truth.  The  question  I  next  ask  myself  is :  What  are  the  responsibilities  of 
the  accountant?    We  are  coming  to  know  and  to  realize,  day  by  day,  and 

12 


year  by  year,  that  the  investing  public  are  learning  to  rely  more  and  more 
upon  the  certificate  of  the  accountant ;  that  as  much  reliance  is  being  placed 
upon  this  as  upon  the  names  of  those  who  stand  sponsor  for  the  projected 
enterprise,  prominent  in  the  financial  and  commercial  world  though  they 
may  be.  It  is  a  recognized  fact  that  the  flotation  of  any  scheme,  large  or 
small,  where  public  subscriptions  are  invited  is  hardly  possible  in  the  absence 
of  the  certificate  of  a  Chartered  Accountant  of  known  and  recognized  stand- 
ing in  the  community. 

Within  the  past  year  I  have  knowledge  of  three  instances  of  attempts 
being  made  to  float  enterprises  which  were  found  impossible  in  the  absence 
of  the  certificate  of  a  known  and  recognized  accountant.  In  every  instance 
the  flotation  was  successful,  the  accountant's  certificate  having  been  obtaied, 
the  enterprises  having  been  found  deserving. 

In  this  view  of  the  case  the  responsibility  which  rests  upon  the  account- 
ant is  impressed  upon  me  as  being  so  grave  and  serious  that  it  cannot  be 
treated  lightly.  Knowing  that  upon  the  strength  of  statements  to  which 
we  certify  will  follow  the  investment  of  hundreds  of  thousands  of  dollars, 
the  hard  earned  savings  of  persons  who  know  little  or  nothing:  of  business, 
and  who  depend  upon  the  word  of  the  accountant  as  to  the  possible  profit- 
earning  power  of  the  enterprise  in  which  these  savings  are  being  invested, 
it  behooves  us  as  accountants  to  so  prepare  our  reports  arid  certificates  that 
in  case  of  failure  to  realize  anticipations,  the  blame  may  not  be  placed  upon 
our  shoulders.  We  must  do  this  if  the  profession  of  accountancy  is  to  be 
enduring  and  respected. 

ESSENTIALS  OF  THE  ACCOUNTANT'S  REPORT. 

'  What  I  desire  to  impress  upon  accountants  at  this  early  stage  in  our 
consideration  of  this  subject  is  the  necessity  for  stating  the  "whole  truth." 
I  do  not  for  one  moment  wish  it  to  be  understood  that  I  feel  or  think  that 
failure  to  do  this  is  from  any  desire  on  the  part  of  the  accountant  to  hide 
what  ought  to  be  revealed,  but  for  the  reason  that  his  instructions  limit  him 
to  a  certain  course,  and  because  the  telling  of  the  whole  facts  might  be 
prejudicial  to  the  interests  of  those  who  engage  his  services. 

You  ask  my  definition  of  the  phrase :  "the  truth,  the  whole  truth,  and 
nothing  but  the  truth.'* 

I  answer :  that  to  my  mind  the  whole  truth  would  more  nearly  be  told 
if  the  certificate  of  the  accountant  were  to  show  the  revenues  and  expendi- 
tures of  the  several  concerns  entering  the  amalgamation  individually,  and 
year  by  year,  and  not  in  the  aggregate.  If  the  profits  are  gradually  increas- 
ing, the  report  would,  as  it  should  in  all  fairness,  so  show ;  and  on  the  con- 
trary, if  a  decline  or  irregularity  in  the  profit-earning  power  is  apparent, 

13 


the  report  should  so  state,  with  the  particulars  and  reasons  therefor.  This 
as  to  the  profit-earning  power.  As  to  the  valuation  of  the  assets,  the  report 
should  show  the  amount  of  capital  (bona  fide)  engaged  in  each  business. 
This  point,  I  will,  however,  take  up  a  little  later.  If  this  be  done  the  facts 
presented  may  be  perfectly  satisfactory,  or  on  the  contrary,  they  may  be 
such  as  will  have  the  effect  of  deterring  many  of  those  who  now  do  so,  from 
investing  in  shares  of  over-capitalized  companies. 

It  is  possible  that  the  accountant  who  follows  the  course  I  attempt  to 
lay  down  may  not  receive  very  much  of  this  particular  class  of  business; 
but  he  will  be  certain  to  "come  into  his  reward"  at  a  later  period,  when  the 
liquidator  or  receiver  takes  a  hand,  and  an  investigation  follows  for  the 
purpose  of  fixing  the  responsibility.  This  phase  of  the  business  will  be  just 
as  profitable,  besides  being  a  good  deal  more  satisfying  to  the  conscience,  and 
the  accountant  will  feel  that  he  has  fulfilled  well  the  precept  expounded  by 
Polonius  for  the  benefit  of  his  friend  Laertes : 

"To  thine  own  self  be  true 
And  it  must  follow,  as  the  night  the  day, 
Thou  canst  not  then  be  false  to  any  man." 

For  the  purposes  of  this  paper  I  shall  assume : 

SCOPE  OF  THE  INVESTIGATION. 

t- 

(i)  That  two  manufacturing  concerns  in  the  same  line  of  business 
contemplate  amalgamation.  (2)  That  the  report  of  the  accountant  is  to 
form  the  basis  of  the  amalgamation.  (3)  That  the  accountant*s  instructions 
are  general  and  not  specific,  and  include  the  determining  of  the  assets  and 
liabilities,  as  well  as  the  earnings.  (4)  And  that  he  is  acting  for  the  pur- 
chasers and  not  for  the  vendors. 

Accountants  differ  as  to  the  scope  of  an  investigation.  There  are  those 
who  take  the  position  that  the  acountant  is  not  expected  to  make  the  thorough 
examination  which  a  regular  audit  would  entail,  bunt  that  the  genuineness  of 
the  books  and  of  the  balance  sheet  should  be  assumed.  Others  consider  that 
the  accountant  pursuing  an  investigation  would  wish  to  analyze  the  accounts, 
and  that  in  doing  this  we  would  discover  fraud,  if  any  had  been  committed. 

Regular  audits  and  special  investigations  have  or  should  have  the 
same  end  in  view :  the  obtaining  of  a  correct  statement  of  facts.  The  first 
is  for  the  purpose  of  verifying  the  balance  sheet  put  forward  as  presenting 
the  condition  of  affairs  of  the  business  under  review,  for  the  safeguarding 
of  the  interests  of  the  shareholders  or  proprietors.  The  second  (if  on  behalf 
of  a  projected  company)  is  for  a  similar  purpose,  viz :  the  ascertaining  the 
value  of  the  assets,  the  liabilities,  and  the  profit-earning  power. 

14 


STATEMENT  OF  ASSETS  AND  LIABILITIES  ILLUSTRATED. 

For  myself,  I  cannot  well  see  how  an  accountant  can  accept  and  pre- 
pare a  report  from  any  balance  sheet  without  satisfying  himself,  by  a  suf- 
ficient analysis,  of  the  regularity  of  the  accounts  and  of  the  methods  followed 
to  produce  the  various  items  which  enter  into  the  assets  of  a  concern,  or 
which  go  to  make  up  the  revenue  and  expenditure  accounts. 

Leaves  from  experience  are  of  more  practical  value  than  volumes  of 
theory. 

Take  the  following  statement  of  assets  and  liabilities  presented  to  me 
recently  for  an  examination  and  report.  The  revenue  and  expenses  were 
the  subject  of  a  second  statement. 

ASSETS. 

1  Cash  on  hand  and  in  bank $    1,345  40 

2  Bills   receivable    9,953  42 

3  Advertising    due    bills 1,521  95 

4  Mdse.  on  hand 10,000  00 

5  Machinery   and  fixtures 33,204  45 

6  Property  and  franchises 209,765  82 

7  Accounts    receivable    2,260  81 

8  Insurance   accrued    166  86 

$268,218  71 

LIABILITIES. 

9  Bills   payable    $    9,629  45 

10  Accounts  payable    i,447  89 

11  Reserve  account    7,741  37 

12  Capital  account 250,000  00 

$268,218  71 

Items  I  to  5  and  7  and  8  of  the  assets  presented  no  difficulties  in  the  way 
of  verification.  Item  6  (property  and  franchises)  required  investigation 
and  analysis,  which  revealed  the  fact  that  it  represented  nothing  but  a  patent 
with  three  years  yet  to  run,  and  the  balance  "water"  in  the  capital  account. 
Shorn  of  these  the  resources  of  the  company  were  $58,452,  and  the  liabilities 
on  trade  account  $10,477;  cash  investment  of  shareholders  $40,234,  and 
surplus  $7,741. 

WHA 

I  mention  this  case  for  the  purpose  of  emphasizing  my  position  that  it 
is  rarely,  if  ever,  safe  to  assume  the  correctness  of  the  balance  sheet,  and  the 
accountant  who  will  certify,  without  an  examination  and  analysis  in  detail 
sufficient  to  satisfy  himself  of  the  bona  fides  of  the  items  which  enter  into 
such  statement  as  assuming  a  responsibility  from  which  I,  for  one,  should 
wish  to  be  excused. 

Statements  of  the  concerns  should  be  included  in  the  report,  independ- 

16 


ently  of  each  other,  and  based  upon  the  foregoing  specifications  should  con- 
tain information  as  follows : 

(i)  Assets  as  of  a  given  date  (the  same  in  each  instance)  divided 
as  to: 

(a)  Realty. 

(b)  Plant  and  machinery. 

(c)  Merchandise  (raw  material). 

(d)  Merchandise  (in  process). 

(e)  Merchandise  (finished  product). 

(f)  Leasehold. 

(g)  Good  will. 
(h)   Patents. 

(i)    Accounts  receivable, 
(j)    Bills  receivable. 
(k)   Cash  on  hand  and  in  bank. 
(1)    Bills  receivable  under  discount  (indirect), 
(m)  Accrued  interest,  insurance,  etc. 

(n)   And  such  other  divisions  of  the  assets  as  the  nature  of  the 
business  might  demand, 

(2)  Liabilities,  as  of  a  given  date  (the  same  in  each  instance),  divided 
as  to: 

'(a)  Bills  payable. 

(b)  Accounts  payable. 

(c)  Mortgage  indebtedness. 

(d)  Bills  receivable  under  discount  (indirect). 

(e)  Other  indirect  liabilities. 

(f)  Capital  account. 

(g)  And  such  other  divisions  of  the  liabilities  as  the  nature  of  the 

business  might  demand. 

(3)  Revenues  and  expenses  of  each  business  showing  earning  power 
of  each  in  a  given  time  (usually  three  years  if  the  business  has  been  in  opera- 
tion so  long)  and  preferably  covering  the  same  period. 

Taking  the  items  in  these  divisions  in  their  order,  the  accountant  will 
ordinarily  not  be  called  upon  to  verify  items  "a"  to  "h,''  the  land,  buildings, 
stock-in-trade,  leasehold,  etc.,  being  specially  valued  by  independent  valuers. 
If  not,  and  these  are  subject  to  verification  by  the  auditor,  he  should  in  the 
case  of: 

(a)  Realty,  call  for  the  title  deeds  and  see  that  the  account  is  not 
charged  up  with  fictitious  increases  In  value,  or  with  the  annual  taxes,  as  I 
have  found  In  certain  Instances,  and  that  a  sufficient  allowance  has  been 
made  for  depreciation  In  buildings,  etc. 

16 


(b)  Plant  and  machinery,  a  certified  inventory,  which  should  agree 
with  the  sum  set  down  in  the  balance  sheet,  care  being  taken  to  verify  exten- 
sions and  additions,  and  a  comparison  of  price. with  the  original  invoices 
and  that  due  allowance  has  been  made  for  depreciation,  and  obsolete  plant. 

(c),  (d),  (e)  Merchandise,  raw,  in  process,  and  the  finished  product, 
certified  inventories,  which  should  be  checked  both  as  to  quantities  and 
values — an  independent  appraisement  is  altogether  preferable;  comparison 
of  inventory  with  invoices  in  the  case  of  raw  material;  to  see  that  profits  are 
not  anticipated,  a  careful  inspection  of  cost  accounts  is  required.  In  case 
of  manufactured  stock  care  must  be  exercised  to  see  that  office  and  selling 
expenses  are  not  pro-rated,  and  added  to  the  cost  of  goods  appearing  in 
inventory.  Note  should  be  taken  of  the  "dead  wood"  in  the  stock  and  that 
proper  allowance  has  been  made  to  cover. 

(d)  Leasehold,  not  usually  a  consideration,  but  if  found  to  exist,  a 
'special  valuation  to  ascertain  present  value  is  best;  otherwise  the  original 
cost,  less  proportionate  reduction  for  the  expired  period. 

(g)  Good  will.  This  item  can  only  be  determined  by  agreement  be- 
tween the  parties,  and  is  one  which  does  not  seriously  concern  the  account- 
ant, except  that  if  it  is  put  in  at  an  arbitrary  sum  by  the  vendors,  he  should 
see  to  it  that  the  price  be  set  forth  separately  and  distinctly  in  the  "assets"  so 
that  the  purchasers  may  know  just  how  much  they  are  expected  to  pay  for 
the  same. 

(h)  Patents.  Sec  that  these  are  entered  at  their  proper  present 
worth — which  will  be  determined  by  the  remaining  life  thereof,  and  the 
present  "state  of  the  art"  in  that  particular  connection. 

(i)  Accounts  receivable.  A  careful  examination  should  be  made  to 
ascertain  the  condition  of  these,  that  they  are  alive  and  collectible,  and  that 
proper  provision  has  been  made  for  bad  and  doubtful.  Also  that  secreted 
in  the  accounts  receivable  may  not  be  found  charges  for  "goods  on  consign- 
ment" billed  out  at  the  usual  profit,  and  going  to  swell  the  volume  of  output, 
thus  unduly  increasing  the  earnings,  by  the  "anticipation  of  profits." 

(j)  Bills  receivable.  Same  examination  as  in  the  case  of  accounts, 
so  far  as  prospects  of  realization  are  concerned. 

(k)  Cash  on  hand  and  in  bank.  The  same  verification  as  in  a  regular 
audit.. 

(1)  Bills  receivable  under  discount.  This  is  an  indirect  asset  as  well 
as  an  indirect  liability,  and  it  is  important  in  the  case  of  an  amalgamation 
where  the  liabilities  are  being  assumed,  that  information  on  this  point  should 
be  given  and  it  may  be  necessary  that  some  allowance  should  be  made  in 
anticipation  of  "loss  upon  realization." 

17 


(m)  Accrued  interest,  insurance,  etc.  That  the  claim  for  these  is 
fair  aind  proper. 

Turning  next  to  the  question  of  liabiHties,  we  take  up : 
(a)  (b)  Bills  payable  and  accounts  payable.  The  verification  will  be 
the  same  as  in  a  regular  audit.  In  this  connection  it  may  be  proper  to  say 
that  there  is  not  much  danger  of  the  liabilities  being  over-stated.  The  prin- 
cipal danger  lies  in  the  understanding  or  not  taking  to  account  of  the  out- 
standing liabilities,  and  this  must  be  carefully  guarded  against  if  the  transfer 
of  the  business  involves  the  assuming  of  all  the  liabilities. 

(c)  Mortgage  indebtedness.  Verification  by  the  obtaining  of  a  state- 
ment from  the  mortgagees,  both  as  to  principal  and  arrears  or  accrued 
interest. 

(d)  Bills  receivable  under  discount.  The  remarks  under  item  "U' 
in  assets  would  more  properly  come  in  here,  the  same  being  applicable  in 
both  cases. 

(e)  Other  indirect  liabilities.  These  may  be  in  the  nature  of  endorsa- 
tions  (although  a  strictly  improper  and  illegal  proceeding  in  the  case  of  joint 
stock  companies),  claims  for  damages,  disputed  accounts  for  materials,  ser- 
vices or  commissions.  A  distinct  statement  in  writing  as  to  the  existence 
or  non-existence  of  these  should  be  obtained  from  the  proper  officers  of  the 
company. 

(f)  The  value  of  the  business  to  the  purchasers  will  be  represented 
by  the  difference  between  the  assets  and  liabilities  in  each  case  and  if  profit- 
able should  equal  the  issue  of  capital  stock  with  an  addition  to  the  assets  of 
any  undivided  profits,  which  would  enhance  the  value  of  the  equity  to  be 
transferred  to  the  amalgamating  company. 

VERIFICATION    OF   REVENUE. 

The  question  of  revenue  and  expenses  of  operation  will  in  all  probabil- 
ity more  particularly  occupy  the  attention  of  the  accountant,  rather  than  the 
ascertaining  of  the  value  of  the  assets  and  liabilities;  in  fact,  as  I  have 
stated  before,  his  instructions  may  limit  him  to  the  determining  of  these 
without  regard  to  the  other. 

Taking  the  revenue  accounts  first :  the  accountant  will  require  to  make 
a  careful  investigation  of  the  receipts  for  the  period  (usually  three  years) 
under  examination.  He  will  see  that  no  extraneous  revenue  has  been  intro- 
duced and  that  the  progress  in  the  revenue  account  has  been  consistent  and 
steady,  or  otherwise.  He  must  be  watchful  that  the  revenue  account  has  not 
been  increased  by  credits  for  goods  "on  consignment"  with  an  ofY-setting 
entry  to  accounts  receivable.  In  a  recent  case  open  accounts  of  $45,000 
were,  upon  investigation,  found  to  contain  consignments  to  the  extent   of 

18 


over  $30,000,  upon  which  gross  profits  exceeding  twenty  per  cent,  had  gone 
to  the  credit  of  revenue,  thus  enhancing  that  account  by  over  $6,000.  This 
occurred  during  the  last  year  of  the  three  under  examination.  Of  course  a 
very  substantial  increase  in  turnover  and  profits  was  shown,  which  was  purely 
fictitious.  Other  points  which  require  to  be  looked  into  are,  that  goods  "on 
approval"  likely  to  be  returned  to  stock  afterwards,  have  not  found  their 
way  into  the  sales  account,  that  fictitious  sales,  for  the  purpose  of  swelling 
the  revenue  have  been  put  through  the  books,  and  shipments  not  made  be- 
fore close  of  inventory;  that  incompleted  and  unshipped  orders  have  not 
been  credited  to  sales  account,  thus  inflating  revenue  by  ungained  profits; 
that  rebates  and  allowances  are  a  charge  against  sales  and  not  an  addition 
to  merchandise  account.  In  a  word,  the  bona  fides  of  all  sales  especially 
near  the  end  of  the  period  should  be  determined  to  the  satisfaction  of  the 
accountant. 

VERIFICATION   OF  EXPENDITURES  AND  PROFITS. 

It  is  the  duty  of  the  accountant  to  see  that  all  the  expenses  entered  are 
a  proper  charge  against  the  business  and  that  they  are  made  within  the 
proper  period ;  that  there  is  no  reduction  in  expenses  toward  the  close  of  the 
term  under  inspection ;  that  the  expenses  are  regular  and  consistent  and  bear 
a  steady  ratio  to  the  turnover ;  that  proper  and  reasonable  allowances  have 
been  made  for  repairs  and  renewals,  and  that  these  are  charged  against 
revenue  and  not  an  increase  to  capital. 

Excessive  profits  from  any  particular  cause  should  be  noted,  as  for 
instance :  those  which  might  arise  from  the  making  of  heavy  purchases  in 
anticipation  of  an  upward  tendency  in  prices,  and  which  anticipation  had 
been  fulfilled. 

That  all  profits  earned  and  taken  to  account  are  incidental  to  the  busi- 
ness. A  sale  of  real  estate  not  required  for  the  purposes  of  the  business,  and 
made  at  a  substantial  profit,  forms  an  example. 

On  the  other  hand  expenditures  of  exceptional  and  unusual  character 
which  have  gone  to  reduce  the  profits  below  normal  should  be  noted. 

COST   OF  OPERATION. 

In  the  consideration  of  the  cost  of  operation  heed  should  be  given  to 
the  effect  which  a  limited  capital  has  had  upon  the  expenses  of  operation. 
Lack  of  capital  is  naturally  followed  by  increased  borrowings,  and  increased 
borrowings  augment  the  interest  account.  Operation  is  thus  charged  with 
a  sum,  which,  had  adequate  capital  been  invested,  would  have  been  in  the 
nature  of  a  dividend.  By  way  of  illustration :  I  have  In  mind  a  business 
in  which  every  dollar  of  capital  Invested  Is  borrowed.  This  may  appear  an 
extreme  case,  but  such  is,  nevertheless,  sometimes  to  be  found.    The  bor- 

19 


rowed  capital  repre'sented  $100,000.  Upon  this  sum  interest  was  paid  out  of 
the  business  and  charged  to  operating  expenses.  I  am  asked  to  investigate, 
and  find  this  condition.  In  the  preparation  of  the  profit  and  loss  account  I 
eliminate  the  $6,000  interest  paid  on  this  sum,  in  order  to  arrive  at  the  earn- 
ing power  of  the  business.  It  can  readily  be  seen  how  unfair  any  other 
course  would  have  been,  and  how  lack  of  sufificient  capital  in  any  business 
will  impair  the  earning  power  and  afifect  the  showing  as  to  profits,  unless 
allowance  be  made  therefor.  There  is  room  here  for  the  exercise  of  a  dis- 
play of  good  judgment  on  the  part  of  the  auditor  in  determining  what  the 
"adequate  capital"  should  be. 

TRADING   PERCENTAGES. 

English  authorities  suggest  that  it  is  part  of  the  duty  of  the  investigat- 
ing accountant  to  ascertain  the  amount  of  capital  necessary  to  conduct  the 
business  on  its  present  lines  and  report  as  to  the  scope  offered  for  increased 
capital .  investment. 

The  accountant  should  so  far  analyze  the  accounts  as  to  enable  him  to 
furnish  information  upon  the  following  points : 

( 1 )  Proportion  the  stock  bears  year  by  year  to  the  annual  turnover. 

(2)  Rate  per  cent,  of  gross  profit  in  trading  account  on  cost. 

(3)  Rate  per  cent,  of  selling  expense  on  cost. 

(4)  Rate  per  cent,  of  administration  and  office  charges  on  cost. 

An  analysis  sheet  covering  these  and  other  points  of  a  like  nature,  in 
each  iDusiness,  would  enhance  the  value  of  a  report. 

SEPARATE  REPORTS. 

Reports  in  detail  upon  each  business  should  be  prepared  and  furnished 
the  principals,  and  these  should  form  the  basis  upon  which  the  Amalgama- 
tion is  carried  out.  Regard,  of  course,  will  also  be  had  to  the  introduction 
of  other  interests  where  more  extensive  operations  are  contemplated  by  the 
Amalgamating  Company. 

In  addition  to  the  report  in  detail  a  certificate  is  usually  prepared  for 
use  in  the  prospectus.  This  certificate  is  generally  barren  of  all  information 
except  as  to  the  revenues,  expenses,  of  operation,  and  profit  earning  power 
of  the  various  businesses  entering  the  amalgamation,  and  these  in  the  aggre- 
gate. Indeed,  certificates  are  not  uncommon  where  information  is  given 
only  as  to  the  profits  earned  by  the  several  businesses.  It  is  unusual  to  see 
any  reference  to  the  amount  of  capital  invested.  It  occurs  to  me  that  a 
model  certificate  would  be  one  framed  somewhat  after  the  following  style : 

CERTIFICATION. 

Gentlemen — I  beg  to  advise  that  I  have  examined  the  records  of  the 
Brown  Manufacturing  Company,  Limited,  and  of  The  Jones  Manufactur- 

20 


ing  Company,  Limited,  each  for  a  period  of  three  years,  and  certify  to  the 
correctness  of  the  underwritten  statements,  as  to  Capital,  Earnings,  Ex- 
penses of  Operation  and  Net  Earnings,  covering  the  period  given : 


1898 $ $. 

1899 

1900 


Total $ $ $. 

1898 ■ $ $ $ $. 

1899 

1900 


Total $. 

1898 $ $. 

1899 

1900 


Total $ $ $ 

For   further  information   reference   is   made  to   my  reports   in 
detail,  herewith, 

JOHN  THOMPSON,  Accountant. 

I  fully  appreciate  that  the  less  detail  which  appears  in  the  report  the 
better,  for  the  obvious  reason  that  much  of  it  would  not  be  understood  by 
the  average  individual,  and  the  tendency  would  be  to  befog  rather  than 
enlighten ;  and  that  this  is  very  undesirable.  But  I  do  think  that  an  account- 
ant issuing  a  certificate  framed  as  above,  with  a  simple  qualifying  reference 
to  a  report  for  further  and  detailed  information  will  be  placing  himself  upon 
safe  and  sure  ground. 

No  reflection  can  fairly  be  made  upon  the  honesty  and  integrity  of  the 
accountant  afterwards,  and  if  such  should  be  suggested  and  an  investigation 
be  made  as  to  the  reasons  for  failure,  if  failure  has  come  upon  the  enterprise, 
then  the  more  rigid  the  examination  the  brighter  and  better  will  appear  the 
position  of  the  accountant. 

In  presenting  these  views,  I  have  departed  from  the  usual  course  in 
some  respects,  with  the  object,  amongst  other  things,  of  eliciting  discussion 
and  an  interchange  of  views,  as  by  this  means  only  can  these  meetings  be 
made  to  bear  fruit  to  the  fullest  and  best  advantage. 

In  closing  I  cannot  do  better  than  repeat  the  words  of  Mr.  Fisher,  F. 
C.  A.,  President  of  the  Institute  of  Chartered  Accountants  in  England  and 
Wales,  who,  in  speaking  recently  upon  the  subject  of  Accountants'  certifi- 
cates, has  said: 

"In  a  word  let  our  certificates  be  plain,  clear,  and  with  no  uncertain 
sound,  avoiding,  as  sometimes  happens,  a  crowd  of  reservations  and  qualifi- 
cations, of  which  it  is  often  difficult  to  understand  the  meaning.  Let  our 
certificate  exclude  everything  that  ma}^  possibly  be  constructed  into,  or  even 
approach,  the  appearance  of  a  possible  double  or  doubtful  meaning — let  our 

21 


certificates  be  not  only  true  and  bold,  but  intelligible  and  understandable  to 
all  who  read  them.  Thus  will  the  certificate  of  the  Chartered  Accountant 
become  more  and  more  valued  and  relied  upon,  and  the  certifying  accountant 
commended  for  keeping  to  facts,  and  not  attempting  to  prophesy,  or  resort- 
ing to  the  foolish  practice  of  fortune-telling.  To  so  act,  we  shall  merit,  arid 
may  I  not  say  deserve,  the  confidence  to  enjoy  and  to  establish  upon  a  firm 
and,  of  the  general  public,  which  we  all  desire,  lasting  basis." 


22 


Program  for 
Audit  of  a  Natal  Corporation's  Accounts. 

BY  T.  WINSHIP,  F.  S.  A.  A. 


The  Auditor  should  require  the  Secretary  to  supply  him  with  the  fol- 
lowing : 

1.  A  list  of  all  the  books  of  the  Company,  including  the  statistical 

books,  together  with  all  such  books. 

2.  A  trial  balance,  showing  the  arithmetical  accuracy  of  the  books. 

3.  A  list  of  members  with  their  Register  folios,  and  the  number 

of  shares  held  by  each,  together  with  a  list  of  Members  whose 
calls  are  in  arrear  (if  any). 

4.  The  Balance  Sheet  and  Profit  and  Loss  Account  (if  any)  dated 

and  signed  by  authorized  persons. 

5.  The  official  copy  of  the  Articles  of  Association. 

6.  All  Contracts,  Deeds,  Leases  and  other  documents  and  securi- 

ties of  the  Company,  including  the  prospectus,  applications, 
and  the  applications  and  allotments  book. 

The  Articles  of  Association  should  be  read  through,  the  Capital  therein 
stated  being  compared  with  the  books;  the  borrowing  powers  of  the  Com- 
pany and  Directors  noted ;  all  Contracts  therein  specified  being  checked  with 
the  actual  documents,  and  any  other  matters  calling  for  remark  being  care- 
fully noted  for  future  reference. 

Next,  the  Contracts  of  Sale  and  Purchase  (probably  executed  by  a 
Trustee  for  the  Company  before  incorporation)  should  be  carefully  exam- 
ined and  the  issue  of  shares  or  payments  of  cash  checked  against  the  Con- 
tracts, each  document  being  initialled  when  found  correct. 

The  original  applications  for  shares  should  be  scrutinized  and  the 
names  of  allottees  and  number  of  shares  allotted  checked  with  the  Applica- 
tions and  Allotments  Book,  which  should  be  signed  by  the  Chairman  of  the 
Meeting  at  which  the  Shares  were  allotted. 

The  allotments  should  then  be  agreed  with  the  Register  of  Members 
and  each  agreement  initialled,  so  as  to  keep  the  original  issue  of  shares  dis- 
tinct from  any  subsequent  issue. 

23 


The  securities  of  the  Company  such  as  Title  Deeds,  Investments,  etc., 
should  be  very  carefully  inspected,  each  document  being  initialled  as  its  cor- 
rectness is  ascertained.  After  all  documents  have  been  examined  and  the 
Auditor  has  satisfied  himself  that  all  are  in  order,  they  may  be  handed  again 
to  the  Secretary  of  the  Cornpany  and  the  Company's  books,  etc.,  taken  to  the 
Auditor's  office  (when  necessary)  to  be  gone  through. 

This  will  obviate  the  necessity  of  the  Secretary  being  in  attendance 
until  the  work  is  completed,  as  a  list  of  all  notes  and  queries  may  be  conven- 
iently, made  in  a  note  book  kept  for  the  purpose. 

The  Auditor  should  now  carefully  peruse  the  Minute  Books  beginning 
with  the  first  Meeting  of  Directors  when  the  first  allotment  of  shares  was 
made. 

Reading  on  and  noting  anything  particular  or  irregular,  the  whole 
history  of  the  Company  will  be  brought  to  light.  The  Auditor  who  fails  to 
examine  the  Minute  Book  will  lose  much  valuable  information  and  numer- 
ous hints  on  particular  transactions,  which  will,  in  my  opinion,  place  him  at 
a  disadvantage  (sometimes  a  serious  disadvantage)  in  carrying  out  his 
other  duties.  When  all  his  notes  on  matters  in  the  Minute  Book  are  made, 
he  should  refer  these  matters  to  the  Statistical  and  Financial  Books  and  at 
once  ascertain  whether  resolutions  passed  by  the  Directors  or  Members  have 
been  properly  carried  out.  There  are  many  other  and  important  matters 
arising  out  of  the  perusal  of  the  Minute  Boo^s  which  will  readily  occur  to 
the  mind  of  the  Auditor. 

The  Ledger  should  then  be  compared  with  the  Trial  Balance  and  all 
balances  brought  down  or  carried  forward  in  the  Ledger  checked  and  addi- 
tions verified. 

The  Trial  Balance  when  found  correct  by  this  method  should  then  be 
initialled. 

The  Secretary  should  prepare  and  keep  for  the  Auditor  a  Trial  Balance 
before  his  closing  entries  for  the  period  are  passed,  as  well  as  a  final  Trial 
Balance  agreeing  with  the  Balance  Sheet. 

Attention  may  now  be  turned  to  the  Balance  Sheet  itself. 

Taking  the  Capital  and  Liabilities  side  first,  Items  i  and  2  would 
appear  in  the  Articles  and  items  i,  2,  3  and  4  would  appear  in  the  Ledger, 
provided  the  opening  entries  in  the  books  included  the  nominal  capital,  which 
is  the  plan  always  adopted  by  the  writer. 

In  the  above  Balance  Sheet  It  Is  evident  that  nothing  has  been  received 
by  the  Company  on  account  of  the  Forfeited  Shares.  The  Auditor  should 
see  that  a  resolution  declaring  the  shares  to  be  forfeited  has  been  passed  and 
the  conditions  contained  In  the  Articles  as  to  forfeiture  have  been  observed. 

24 


Item  5  will  be  verified  by  the  Call  Book,  Cash  Book,  and  the  counter- 
foils-of  the  Receipts  issued  book. 

Many  Secretaries  prefer  stating  the  Calls  in  arrear  as  an  asset,  but  in 
practice  it  often  happens  that  Calls  in  arrear  are  of  no  more  value  than  bad 
debts  and  the  writer  prefers  to  deduct  such  amounts  from  the  Issued  Capi- 
tal, the  balance  clearly  showing  the  Paid-up  Capital.  (Note. — It  is  on  the 
amount  of  this  Paid-up  Capital  that  a  Joint  Stock  Company's  annual  license 
is  rated.) 

Item  6  will  have  been  verified  by  inspection  of  the  Actual  Mortgage 
Bond  and  the  endorsement  thereof  on  the  Title  Deeds  of  the  land  mort- 
gaged.   If  there  be  no  other  endorsement  the  amount  will  be  correct. 

To  verify  item  7  the  Bank  Account  will  have  to  be  gone  through,  and  all 
deposits  and  withdrawals  carefully  checked  with  Pass  Book,  Deposit  Book 
and  Cash  Book  for  deposits.  Pass  Book,  Cheque  Book  and  Cash  Book  for 
withdrawals.  This  thoroughly  done  will  disclose  the  amount  showing  by 
the  books  as  owing  to  or  by  the  Bank.  A  Certificate  from  the  Bank  should 
also  be  asked  for  by  the  Auditor. 

This  latter  is  necessary,  as  in  same  cases  of  embezzlement  two  pass 
books  have  been  in  use,  and  the  one  handed  to  the  Auditor,  while  agreeing 
with  the  books,  did  not  agree  with  the  actual  account  at  the  Bank. 

Item  8  should  be  verified  by  the  Bill  Book,  Ledger,  Receipts  for  the 
Bills,  and  statements  of  account  to  settle  which  the  Bills  were  given.  The 
Minute  Book  might  also  contain  reference  to  the  transaction  by  which  the 
Bills  were  created. 

The  verification  of  item  9  would  necessitate  comparison  of  the  accounts 
as  rendered  by  Creditors,  with  the  Ledger  and  any  Journal  entries  made  to 
pass  the  amounts  to  the  credit  of  the  parties ;  the  Minute  Book,  which  should 
contain  a  record  of  all  accounts  passed;  the  Order  Book,  which  might  be 
perused  in  order  to  discover  whether  any  orders  had  been  issued  before  the 
date  of  the  Balance  Sheet  other  than  those  for  which  accounts  were  pro- 
duced; and  the  Goods  Received  book  to  ascertain  whether  goods  had  been 
received  prior  to  the  date  of  the  Balance  Sheet  which  were  not  accounted 
for  in  the  list  of  Creditors. 

It  must  be  borne  in  mind  that  every  item  in  a  Balance  Sheet,  except  the 
actual  cash  in  hand  (which  of  course  can  be  verified)  is  at  best  but  an  esti- 
mate, and  tentative,  the  net  result  of  a  combination  and  classification  of  all 
the  items  forming  neither  more  nor  less  than  a  statement  of  the  approximate 
position  of  a  Company  at  a  given  date. 

It  sometimes  happens  that  Creditors'  accounts  come  in  after  the  Balance 
sheet  has  been  certified  and  which  in  the  nature  of  the  case  could  not  have 
been  rendered  before. 

25 


It  is  also  sometimes  the  case  that  Directors  withhold  accounts  for  addi- 
tions to  Stock  in  order  to  cover  a  loss  on  the  trading  account.  In  the  second 
year's  audit  the  payments  during  the  first  month  or  two  of  the  financial 
period  should  be  carefully  examined  in  order  to  see  whether  any  such  pay- 
ments were  for  goods  invoiced  during  the  last  month  or  so  of  the  first  year. 
It  is  much  more  difificult  to  detect  a  fraud  in  the  first  year's  audit  than  in  any 
subsequent  one,  as  the  opportunity  of  testing  payments  after  the  end  of  the 
year  is,  of  course_,  non-existent. . 

Item  lo  should  be  compared  with  the  Dividend  Book,  Warrant  Count- 
erfoils, Dividend  Account  at  the  Bank,  Dividend  Account  Pass  Book  and 
Bank  Certificate,  Minute  Book,  recording  the  resolution  to  pay  the  Dividend, 
and  the  Register  of  Members  to  verify  the  amount  of  dividend  payable  to 
those  Members  whose  Dividend  Warrants  had  not  been  presented  at  the 
Bank. 

Reserve  Fund  item  ii,  should  be  the  amount  of  nett  profit  set  aside  to 
provide  for  contingencies  such  as  a  breakdown  of  machinery  or  other  losses, 
or  the  equalization  of  Dividends,  or  for  any  purpose  stated  in  the  Articles, 
and  should  be  verified  by  the  Minute  Book  containing  the  resolution  of  the 
Members  (or  the  Directors  if  so  empowered)  authorizing  the  creation  of 
the  Fund.  The  securities  for  the  investment  might  also  be  examined  at  the 
same  time. 

Thus  far  it  will  be  seen  that  the  writer's  idea  of  auditing  is  to  check 
each  item  on  the  Balance  Sheet  with  the  Books  and  documents  relating 
thereto,  instead  of  the  more  usual  method  of  taking  say  the  Cash  Book  and 
checking  all  the  postings  into  the  Ledger  and  then  proceeding  in  the  same 
manner  to  check  the  other  books. 

Turning  now  to  the  assets  side  of  the  Balance  Sheet,  item  i  would  be 
verified  by  inspection  of  the  Purchase  agreement,  if  any.  Title  Deeds  (the 
Transfer  Deeds  would  state  the  amount  of  the  purchase  consideration),  and 
the  payment  of  the  purchase  price  if  the  freehold  were  so  acquired. 

Items  2  and  3,  if  not  included  in  the  Purchase  Agreement,  would  have 
to  be  verified  as  follows : — All  the  postings  from  the  Cash  Book  and  Journal 
or  other  books  would  be  checked  with  the  Ledger  and  with  the  Vouchers  for 
payments,  the  Vouchers  in  turn  compared  with  the  Invoices  (not  a  difificult 
task  when  Invoices  and  Vouchers  bear  the  same  number),  as  certified  by  the 
Manager  or  other  authorized  person,  then,  the  cost  having  been  arrived  at, 
the  Minute  Book  should  record  the  resolution  of  the  Directors  authorizing 
the  agreed  amount  of  depreciation  to  be  written  ofif,  the  balance  being  the 
amount  set  down  in  the  Balance  Sheet.  To  check  the  actual  value  against 
original  cost  less  depreciation,  a  valuation  might  be  made  by  a  competent 

26 


person,  but  if  the  depreciation  appeared  sufficient  this  latter  precaution  would 
not  be  necessary. 

It  has  been  held  that  an  Auditor  is  neither  a  Stock  Expert  nor  a  Valuer, 
but  it  seems  only  reasonable  that  he  should  carefully  examine  the  basis  of 
the  book  value  of  the  assets  and  use  his  best  endeavors  to  see  that  proper 
depreciation  was  being  allowed  for. 

Item  4 — The  Contract  for  building  (if  any)  might  be  inspected,  and  the 
instalments  paid  on  account  ascertained,  and  also  the  final  payment  agreed 
with  the  Contract  price. 

No  depreciation  having  been  allowed  for,  it  is  probable  that  the  build- 
ings were  only  completed  a  considerable  time  after  fhe  Company  com- 
menced business. 

If  the  buildings  were  taken  over  by  agreement  with  Vendors  the  Con- 
tract should  be  inspected  and  a  valuation  of  the  buildings  obtained. 

To  ascertain  the  correctness  of  item  5  the  Bills  Receivable  Book  would 
of  course  be  inspected.  Besides  this  it  would  be  necessary  to  trace  the 
amounts  for  which  the  Company  held  the  Bills  to  their  source  of  original 
entry,  and  a  receipt  for  the  goods  or  other  assets  sold  or  disposed  of  or  some 
such  document  or  entry  produced.  The  nature  of  the  Bills,  date  of  matur- 
ity and  other  matters  would  guide  the  Auditor  in  tracing  the  evidence.  And 
now  that  forged  signatures  or  alleged  forged  signatures  are  somewhat  com- 
mon, it  m-ight  be  well  for  the  Auditor  to  get  an  acknowledgment  in  writing 
from  the  makers  of  the  Bills  that  their  signatures  to  the  various  amounts 
were  genuine. 

The  verification  of  item  6  is  a  somewhat  longer  piece  of  work.  For 
this  purpose  the  Day  Books,  Delivery  Books,  and  possibly  other  sources  of 
original  entry  would  have  to  be  checked  with  the  Ledger  accounts,  and  re- 
turns or  other  credits  carefully  and  exhaustively  examined,  and  any  Journal 
entries  bearing  on  the  Sales  and  Returns  Accounts  checked  with  the  Ledger. 
All  credit  postings  from  the  Cash  Books  to  Ledger  would  have  to  be  checked 
with  the  counterfoils  of  Cash  Receipts  Book;  and  a  debit  slip  stating  the 
amount  said  to  be  due  might  be  posted  to  each  debtor,  with  a  request  that  it 
be  returned  to  the  Auditor  certified  by  the  debtor.  In  practice,  however,  this 
precaution  seldom  works  well,  as  Debtors  will  not  generally  take  the  trouble; 
Creditors  might. 

The  checking  of  this  item  will  have  exhausted  the  work  on  the  Day 
Books  and  one  side  of  the  Cash  Book. 

The  next  question  in  this  connection  Is  whether  all  the  Debts  are  good. 
If  all  the  Debtors  have  consistently  paid  their  accounts  during  the  year,  and 
the  balances  at  the  end  of  the  year  are  for  purchases  within   a   reasonable 

27 


time  of  that  date,  no  provision  for  bad  debts  would  appear  to  be  necessary. 
This,  however,  is  seldom  the  case,  a  provision  for  bad  debts  generally  being 
necessary. 

This  is  a  point  of  very  common  disagreement  with  Directors,  and  often 
old  accounts  for  goods  sold  during  a  previous  period  are  included  among  the 
debts  said  to  be  good. 

While  the  Auditor  cannot  compel  the  Directors  to  alter  their  way  of 
thinking  on  such  matters,  he  will  find  that  tact  and  good  judgment  will 
often  have  the  desired  effect.  When  it  is  otherwise,  and  the  Directors  are 
stubborn,  the  Auditor's  responsibility  is  fully  discharged  by  reporting  what 

NATAL  HARDBRICK  COMPANY  LIMITED. 


Balance  Sheet  as  at  30th  March,  1903. 


1  To   Nominal 

Capital     £30.000    in 
30.000   Shares  of 

£1     each      £30000 

Less 

2  To    Reserve 
Shares    (1000) 

£1.000     0     0 

3  To   Unissued 
Shares    (1000) 

1000     0     0 

4  To   Forfeited 
Shares    (1000) 

1000     0     0 


0     0 


3000     0     0 


Issued     Capital  .£27000     0     0 
Less 
5  To  Calls  in  Arrear 

as  per   Schedule..     8000     0     0 


Paid-Up   Capital    £24000     0 

6  To   First    Mortgage 

Bond    . .'. 4000     0     0 

(Title     Deeds     of 
part     Freehold 
Land  as  Security) 

7  To  Bank  Overdraft     3000     0     0 

(Secured     by    Di- 
rectors   Guarantee) 

8  To   Bills    Payable..      1000     0     0 

9  To    Sundry     Cred- 

itors,  as  per 

Schedule    500     0-0 

10  To   Unclaimed   Divi- 

dends             100     0     0 

11  To    Reserve    Fund.      2000     0     0 


Balance,  carried  to 
Profit  and   Loss 
Account     


10600     0 


5400     0     0 
£40000     0     0 


By  Freehold  Land, 

at  cost   £11000 

By    Plant,    cost.  ...  £5500     0     0 
Less    depreciation.       500     0     0 


5000     0     0 


By  Machinery,  cost  11000 
Less    depreciation.     1000 


per 


4  By  Buildings,   at  cost.... 

5  By    Bills    Receivable 

6  By      Sundry      Debtors, 

Schedule    

7  By  Investment  of  Reserve  Fund.  . 

8  By    Stock    of    Bricks    on    Hand    at 

date,   at   cost 


10000 
6000 
1000 

2000 
2000 


3000     0     0 


£40000     0     0 


he  believes  to  be  the  true  state  of  affairs  to  the  Shareholders.  More  than 
this  he  cannot  do,  nor  is  it  expedient  that  he  should  do;  but  he  must  not  do 
less. 

Item  7  should  not  give  much  trouble  as  the  specific  investments  would 


28 


be  readily  checked  by  the  production  of  the  documents  of  Fixed  Deposits 
Receipts,  if  so  invested,  or  other  proper  securities. 

Item  8  on  the  other  hand,  is  one  of  the  most  important  in  the  Balance 
Sheet,  and  one  which  has  been  fraudulently  manipulated  oftener  than  all  the 
other  items  put  together. 

And  although  an  Auditor  is  not  necessarily  a  stock  expert  he  may  be 
an  expert  in  relation  to  any  particular  stock  of  which  he  has  sufficient 
knowledge.  It  is  absurd  to  suppose  that  because  an  Auditor  is  an  Auditor 
he  must  therefore  be  ignorant  of  any  particular  stock  and  the  method  of 
valuing  it.  As  a  matter  of  fact  an  Auditor  of  long  experience  is  almost 
bound  to  be  a  stock  expert  of  some  kind,  by  reason  of  his  experience.  And 
the  writer  has  often  been  considerably  helped  by  a  knowledge  of  the  value 
of  the  particular  stock  set  forth  on  the  balance  sheet. 

First  of  all,  the  Auditor  should  see  that  a  good  system  of  cost  accounts 
is  kept.  Then  the  stock  in  hand  should  be  certified  by  the  Manager,  Manag- 
ing Director,  or  other  such  authorized  official,  both  as  to  qaantity  and  cost 
price,  which  certificate  the  Auditor  should  refer  to  in  his  report. 

He  should  further  take  all  the  ways  and  means  of  verifying  the  stock 
that  the  circumstances  of  the  case  suggest,  and  where  unsatisfactory  answers 
to  his  questions  are  given,  he  should  probe  the  matter  to  the  bottom,  and  if 
necessary  employ  a  stock  expert  to  value  the  goods.  In  the  case  before  us 
the  cost  of  bricks  and  number  in  stock  is  generally  easily  ascertainable,  but 
the  Auditor  should  fully  satisfy  himself  before  passing  the  accounts.  ^ 

We  now  turn  to  the  Manufacturing  and  Trading  Account,  and  profit 
and  Loss  Account,  which  for  illustrative  purposes  may  appear  as  shown : 

Beginning  with  the  expenditure  side,  item  12  will  be  checked  by  an 
examination  of  the  total  amount  paid  for  coal  during  the  period,  less  stock 
on  hand,  if  any. 

In  the  case  we  are  considering  there  is  no  stock  on  hand  as  the  item  is 
not  found  among  the  assets. 

In  the  case  of  stock  being  on  hand  the  Manager  should  certify  the 
quantity. 

Item  13  would  be  treated  similar  to  the  above,  the  invoices  being  com- 
pared with  the  vouchers  and  the  goods  received  book,  and  the  amounts  paid 
and  charged  through  the  cash  book  with  the  vouchers. 

Item  14  and  15  present  more  difficulty.  The  wages  book  at  the  works, 
which  are  usually  some  distance  from  the  Head  Office  of  the  Company, 
should  be  carefully  checked  with  Work  Tickets  issued  to  Natives  and  In- 
dians. These  Tickets  are  numbered  and  contain  the  name  of  the  erriploye, 
each  day  worked,  total  days  worked,  rate  of  pay  and  total  paid,  the  Wages 

»        29 


book  being  copied  from  the  tickets.  The  Ticket  and  the  Book  should  there- 
fore agree. 

As  to  White  Men's  pay  a  receipt  is  generally  given  either  on  a  separate 
form,  or  the  Book  is  signed. 

One  of  the  chief  features  of  checking  wages  is  to  ascertain  by  inde- 
pendent inquiry  that  the  number  of  men  are  actually  at  work,  and  some 
trouble  will  have  to  be  taken  by  the  Auditor,  unless  he  relies  on  a  Certificate 
from  tlie  Works'  Manager,  when  such  should  be  stated  in  his  report. 

Item  1 6  should  be  traceable  through  the  books  and  should  be  treated 
in  the  same  way  as  items  12  and  13. 

MANUFACTURING  AND  TRADING  ACCOUNT. 
p'oR  THE  Year  ended  30th  March,  1903. 


12  To  Coal  Consumed.  £2000     0     0 

13  To   Native  and   In- 

dian    Rations...     1500     0     0 

14  To   Native  and   In- 

dian   Wages     ..     1500     0     0 
17  To  White  Men's 

Wages      500     0     0 

16  To    Stores   and  Re- 

pairs           1000     0     0 

17  To     Railway      Car- 

riage           1000     0     0 

£7500 

Balance,    carried 

to    profit    and 

Loss     Account 10500 

£18000 


By  Brick  Account — 

9  By  Sales  for  the  Year £15000     0     0 

10  By  Stock  on  Hand,  at  cost 8000     0     0 


£18000     0     0 


PROFIT    AND    LOSS    ACCOUNT. 


18  To   Directors'    Fees.  £110 

0 

0 

By   Balance   from   Manufacturing 

19  To   General    Charges     100 

0 

0 

and  Trading  Account £10500 

0     0 

20  To    Insurance    100 

0 

0 

11  By  Transfer  Fees   10 

0     0 

21  To   Salaries    300 

0 

0 

*i 

»2  To    De- 

preciation 

on 

Plant    .  £500     0     0 

To  Depre- 

ciation 

on   Machin- 

ery   ...   1000     0     0 

1500 

0 

0 

2110 
3000 

0 
0 

0 
0 

23  To  Dividend  Paid,  10%... 

Balance,    being 

net   profit   for 

the  year    8400 

0 

0 

Less  Dividend 

Paid     3000 

0 

0 

5400 

0 

0 

£10510 

0 

_0 

£10510 

0     0 

Item  ly  could  be  checked  by  the  Railway  Consignment  Notes,  Monthly 
Statements  rendered  from  the  Chief  Accountant's  Office  of  the  Railway  and 
the  Vouchers. 

Items  1 8  and  21  might  be  referred  to  the  Articles  and  the  Minute  Book 
respectively,  and  of  course  proper  receipts  should  be  produced. 


30 


Items  19  and  20  present  no  difficulty,  as  they  should  be  easily  traceable 
through  the  Cash  Book  to  the  Ledger,  Vouchers  to  support  the  entries  being 
forthcoming. 

Particulars  of  item  22  should  be  found  in  the  Minute  Book  as  a  reso- 
lution authorizing  the  amounts  to  be  written  off.  Depreciation  is  nearly 
always  a  bone  of  contention  between  Directors  and  Auditors. 

It  is  not  always  easy  to  decide  how  much  should  be  written  off  for 
depreciation.  Some  maintain  that  when  repairs  and  renewals  are  charged  to 
revenue  and  the  plant  or  machinery  maintained  in  good  and  effective  work- 
ing order,  it  is  not  necessarv  to  provide  for  depreciation.  This  is  a  very 
popular  fallacy,  but  is  easily  shown  to  be  a  fallacy  by  a  little  common  sense. 

Take  a  steam  engine,  the  life  of  which  when  maintained  in  good  order 
♦  is  so  many  years  (bar  accidents  of  course). 

During  the  first  year  all  repairs  and  renewals  have  been  charged  to 
revenue,  and  the  value  of  the  engine  as  an  asset  is  shown  on  the  Balance 
Sheet  at  original  cost.  But  one  year  of  the  life  of  the  engine  has  gone,  and 
although  it  has  been  maintained  in  good  working  order  out  of  revenue,  the 
value  has  depreciated  or  become  less  by  the  same  proportion  that  one  year 
bears  to  the  total  estimated  life  of  the  engine ;  hence  that  proportion  should 
be  charged  to  revenue,  and  the  balance  only  remain  as  the  asset  value. 

There  will  come  a  time  when  the  engine  will  have  worn  itself  out,  no 
matter  how  well  it  may  have  been  maintained,  and  when  that  time  comes  it 
wdll  only  be  worth  what  it  will  fetch  as  old  iron. 

If  that  ultimate  sale  value  be  deducted  from  original  cost,  we  have  the 
amount  of  real  asset  value  of  the  engine.  This  amount  should  be  divided  by 
the  estimated  number  of  years  of  the  life  of  the  engine,  the  amount  thus 
found  being  written  off  annually.  It  may  be  urged  that  this  whole  process 
is  only  estimation.  That  in  fact  is  so,  but  so  is  every  other  item  on  the  Bal- 
ance Sheet  until  the  Company  has  been  wound  up,  or  the  whole  of  the  assets 
sold  and  turned  into  a  cash  sum.  Then  and  then  only  the  truth  is  out,  and 
the  estimate  no  longer  necessary. 

It  may  be  added  that,  in  providing  for  depreciation  generally,  several 
factors  must  be  taken  into  account,  such  as  the  nature  of  the  asset  and  its 
functions ;  whether  it  is  being  carefully  or  improperly  used ;  its  upkeep,  and 
various  other  matters. 

The  correctness  of  item  23  might  be  arrived  at  by  referring  to  the  reso- 
lution authorizing  the  payment  of  the  Dividend,  the  Dividend  Warrant 
Counterfoils  and  Bank  Pass  Book;  also  the  Register  of  Members  should  be 
agreed  with  the  Dividend  Book.  It  should  also  be  noted  that  unless  the 
Articles  specially  authorize  it,  the  payment  of  an  Interim  Dividend  is  illegal. 

31 


NATAL    HARDBRICK    COMPANY    LIMITED. 

Costs    of    Manufacture,    Month    of 190 

Number    of    raw    bricks    made 1,000,000 

Number    of    bricks    burnt 900,000 

Balance    raw    bricks    on    hand 100,000 

MAKING. 

Section  1.     Excavating  and  Filling  Trucks: 

Wages   as   per   Wages    Book 

Rations  as  per  Rations   Issued   Book 

Depreciation    of   Hoes,    Shovels    and    Trucks 

Section  2.     Hauling: 

Wages   as   per  Wages    Book 

Rations  as  per   Rations   Issued   Book 

Coal    as    per    Coal    Book 

Stores   (Oil,  etc.)   as  per  Stores  Issued  Book 

Section  3.     Machining  and  Cutting: 

Wages   as   per  Wages   Book 

Rations  as  per  Rations   Issued   Book 

Coal    (proportion  for  machines)    as  per  Coal   Book.. 

Stores    (including   new    Dies,    Cloth,    Zinc,   Oil,    etc.) 

as   per    Stores    Issued    Book 

Section  4.     Trucking  to  Drying  Sheds: 

Wages  as   per  Wages   Book 

Rations  as  per  Rations   Issued  Book 

Depreciation    of    Trucks,    etc 


Total  cost  of  making,  including  Stacking  in  Sheds  to  Dry £600     0     0 


burning: 

Section  5.     Trucking  to  Kilns  and  Packing: 

Wages   as   per   Wages    Book 

Rations  as  per  Rations   Issued   Book..., 
Depreciation     of    Trucks 

Section  6.     Burning: 

Coal    consumed    in    No.    1    Kiln 

Coal    consumed    in    No.    2    Kiln 

Coal   consumed   in    No.    3    Kiln 

Coal    consumed   in    No.    4   Kiln 

Coal   consumed   in   No.    5    Kiln 

Coal    consumed    in   No.    6    Kiln 

Wages  of  Firemen,  as  per  Wages  Book. 
Rations   as    per    Rations    Issued    Book... 

Section  7..  .Unloading  Kilns  into  Railway  Trucks: 

Wages   as   per  Wages   Book 

Rations  as  per  Rations  Issued  Book.... 


Total    cost    of   burning £810     0     0 


Note. — Percentage   for  broken,   cracked   and   otherwise   damaged   bricks   to   be   deducted   from   total 
output. 


ANALYSIS. 

Cost    of    making £600  0  0 

Cost    of    burning 810  0  0 

Total    cost    £1410  0  0 


Number    made     1,000,000 

Number    burnt     900,000 

=  900,000    @    30/-  per   thousand   burnt £1350 

=  100,000    @    12/-    per    thousand    raw 60 

£1410 


32 


We  have  now  exhausted  the  other  side  of  the  Cash  Book  and  the 
Journal. 

On  the  Revenue  side  of  the  Trading  Account,  items  9  and  10  will  have 
already  been  examined  under  items  6  and  8  respectively  of  the  Assets  side  of 
the  Balance  Sheet,  as  already  detailed;  but  a  word  re  cost  accounts  of  a 
brickmaking  concern  may  not'  be  out  of  place. 

The  Wages  Book  should  be  divided  up  into  sections,  under  the  follow- 
mg  heads : 

1.  Excavating  and  filling  trucks. 

2.  Hauling  to  Machines. 

3.  Machining  and  Cutting. 

4.  Trucking  to  Drying  Sheds. 

The  total  of  these  sections  will  furnish  the  wages  cost  of  raw  bricks. 
Then  the  following  sections  give  the  wages  cost  of  burning  and  loading 
info  trucks  ready  for  despatch : 

5.  Trucking  to  Kilns  and  Packing. 

6.  Burning. 

7.  Unloading  Kilns  into  Railway  Trucks. 

We  will  now  consider  these  sections  of  the  Wages  Book.  A  good  rul- 
ing for  a  Wages  Book  is  as  follows : 

HARDBRICK  COMPANY  LIMITED. 

Wages  Book  for  Month  of  1903- 

Percentage  for  White  Overseer. 
"                 "           Manager 
Total  of  this  Section   £ 

and  so  on  for  the  other  sections,  with  a  place  for  percentage  of  Mana- 
ger's and  Engineer's  time  when  necessary.  The  totals  of  each  section  should 
be  extended  into  an  outer  column,  the  total  of  which  would  be  the  total 
wages  for  the  month. 

Next,  the  Rations  issued  would  be  apportioned  to  the  employees  in  the 
various  sections. 

The  Coal  (which  is  generally  passed  through  a  box  without  a  bottom, 
holding  an  ascertained  quantity)  would  be  apportioned  between  Engine  and 
Kilns,  in  a  book  kept  for  the  purpose,  and  in  which  is  recorded  the  trucks  of 
Coal  as  they  arrive,  with  their  numbers  (for  identification  of  the  Invoices), 
the  balance  on  hand  at  the  end  of  each  month  being  carried  to  the  following 
month  and  the  accounts  agreed  and  ruled  ofT. 

Stores  and  repairs  would  also  be  allocated  to  their  proper  sections,  and 
the  final  cost  accounts  should  appear  in  the  form  shown. 

The  Correctness  of  item  11  might  be  ascertained  by  an  examination 

33 


of  the  Register  of  Transfers,  where  a  column  is  usually  provided  for  "Fees 
Paid,"  and  the  Cash  Book  and  Receipts  Counterfoil;  but  where  a  charge  is 
always  made,  the  number  of  shares  transferred  would  be  sufficient  check. 

The  Work  on  the  Wages  Book,  Day  Books,  Journal,  Cash  Book, 
Ledger,  and  all  other  subsidiary  books  will  now  have  been  exhausted. 

The  Ledger  should  now  be  taken  and  examined  with  a  view  of  discov- 
ering whether  any  item  has  not  been  ^'ticked"  off;  also,  all  the  other  books 
should  be  similarly  examined;  all  additions  and  amounts  "carried  forward" 
and  "brought  forward"  checked,  and  all  being  found  in  order,  the  actual 
auditing  of  the  financial  accounts  may  be  said  to  be  complete. 

Regarding  the  statistical  books,  wherein  the  names  and  addresses  of 
Members  are  kept,  with  the  number  of  shares  held  by  each,  the  numbers  of 
the  shares,  and  other  particulars,  a  diversity  of  opinion  exists  as  to  whether 
the  checking  of  such  books  is  part  of  the  Auditor's  duty.  The  majority  of 
Auditors  regard  such  work  as  not  being  part  of  the  ordinary  duties  of  an 
Auditor,  but  a  special  duty  for  which  a  special  fee  should  be  paid. 

In  practice  it  seldom  happens  that  there  is  any  audit  of  these  books,  and 
matters  are  allowed  to  go  on  from  year  to  year  until  the  Directors  are  called 
upon  to  make  good  the  value  of  shares  issued  in  excess  of  the  issued  Capital 
of  the  Company. 

Elaborate  arguments  have  been  advanced  for  the  examination  and  can- 
cellation of  Vouchers  by  the  Auditor.  Cases  are  on  record  where  the  same 
voucher  was  produced  for  two  distinct  payments. 

If  the  vouchers  are  kept  in  a  guard  book,  properly  filed  away,  they 
might  (if  not  too  numerous)  all  be  examined  on  the  same  day,  and  while 
the  book  was  in  the  Auditor's  possession.  When  they  are  loose,  and  not  all 
taken  at  once,  there  is,  of  course,  the  possibility  of  Vouchers  being  used 
twice. 

Rubber  cancellation  stamps  have  been  suggested,  but  some  men  will 
get  over  that  check  by  erasing  with  chemicals,  which  has  also  been  known  to 
happen. 

In  an  extensive  audit,  the  Auditor  should  have  the  particulars  of  the 
Vouchers  called  over  by  a  responsible  clerk,  complete  up  to  a  given  date  (if 
not  convenient  to  check  all  at  once),  the  Vouchers  all  being  cancelled  when 
found  in  order.  In  a  small  audit,  and  with  the  Voucher  book  in  his  posses- 
sion, the  Auditor  would  hardly  fail  to  discover  the  same  Voucher  for  two 
payments. 


84 


Dicksee  on  Special  Considerations  in 
Different  Classes  of  Audits* 


GAS  COMPANIES. 


An  especial  feature,  from  the  Auditor's  point  of  view,  is  the  division  of 
all  expenditure,  into  two  classes — Capital  and  Revenue.  The  wording  of 
the  statutory  form  of  accounts  will  probably  sufficiently  indicate  the  basis 
of  this  division ;  it  remains,  therefore,  to  say  that,  perhaps,  the  Auditor's 
most  important  duty  is  to  see  that  this  basis  is  maintained.  It  is  not,  how- 
ever, always  possible  for  the  Auditor  to  judge  as  to  the  correctness  with 
which,  say,  the  cost  of  an  extension  has  been  apportioned  as  between  Capital 
and  Revenue;  nor,  indeed,  is  it  necessary  that  he  should  so  constitute  him- 
self an  engineering  expert.  He  will,  however,  require  to  see  that  the  com- 
pany's engineer  has  certified  the  apportionment  to  be  correct,  and  that  the 
expenditure  on  Capital  Account  has  been  passed  by  the  Board.  In  addition, 
it  is  desirable  that  he  should  satisfy  himself  that  the  principle  followed  by 
the  engineer  in  arriving  at  his  apportionment  is  a  sound  one.  There  is, 
properly  speaking,  no  "safe  side"  in  these  matters — an  undue  charge  to 
Capital  is  unfair  to  the  proprietors,  while  an  undue  charge  to  Revenue  is 
(through  the  operation  of  the  sliding  scale)  an  injustice  to  the  consumers. 
The  following  examples  of  apportionment  will,  however,  be  found  useful, 
as  indicating,  in  general  terms,  the  correct  method  of  arriving  at  the  amount 
chargeable  against  Capital,  and  against  Revenue,  in  any  special  case  that 
may  arise : 

New  Works  (including  extensions)  :    Capital.   ' 

New  Works  in  place  of  Old  Works  :  Charge  original  cost  of  old 
works  pulled  down,  less  value  of  old  materials^  against  Revenue ;  charge  the 
remainder  against  Capital.  (This  amounts  to  debiting  Capital  with  total 
cost,  debiting  Revenue  and  crediting  Capital  with  original  cost  of  old  works, 
and  crediting  Revenue  with  value  of  old  materials  sold.) 

Conversions:  In  a  similar  case  to  the  last,  except  that  certain  old 
materials,  instead'  of  being  sold,  are  used  for  other  purposes  on  the  works, 
treat  the  particular  department  of  Capital  Expenditure  as  the  purchaser  of 
the  old  materials  in  question,  debiting  it  with  the  value  of  the  materials  and 
the  full  cost  of  conversion  (if  any). 

85 


The  income  of  a  Gas  Company  consists  of  Gas  Rates,  Meter  Rents, 
Residuals  sold,  and  generally  profit  on  Fittings  and  Rents,  in  addition  to 
Transfer  Fees  and  Interest  on  Investments.  Trie  collections  of  Gas  Rates 
and  Meter  Rents  are  best  checked  in  totals  (in  the  manner  shown  under 
Fire  Insurance  Accounts,  care  being  taken  to  fully  test  both  allowances 
and  arrears),  the  total  receivable  being  arrived  at  from  the  State  of  Meters 
Book,  which  will  show  the  total  amount  of  gas  consumed  and  what  meters 
are  on  hire.  The  residuals  sold  cannot  well  be  checked  as  to  quantity  (save 
by  comparing  the  results  of  various  working  statements),  but,  of  course, 
the  Auditor  may,  and  should,  check  the  collection  of  the  amounts  debited. 
The  same  remark  applies  to  fittings,  which  will  almost  invariably  be  found 
to  form  a  part  of  a  Gas  Company's  business,  although  no  mention  of  the 
circumstance  will  be  found  in  the  statutory  form  of  accounts.  It  may  be 
added  that  it  is  best  merely  to  state  the  profit  arising  from  fittings  on  the 
credit  side  of  the  Revenue  Account  (rather  than  to  credit  Revenue  with  In- 
come, and  to  debit  it  with  Expenses),  as  there  is  nothing  gained  by  showing 
the  whole  world  what  percentage  of  profit  has  been  made.  The  two  lead- 
ing items  of  expenditure  arise  from  stores  and  wages,  and  both  must  be 
fully  vouched  for,  and  carefully  tested.  All  Cash  Book  entries  must,  of 
course,  be  vouched,  and  the  additions  checked  and  the  balance  verified ;  also, 
all  the  General  Ledger  postings  should  be  called  back. 

.  Some  companies  charge  all  renewals  and  repairs  against  the  Revenue 
of  the  year  in  which  they  are  executed,  but  a  more  scientific  method  is  to  set 
aside  a  sufficient  sum  annually  for  renewals,  and  to  charge  their  cost  against 
the  fund  so  created.  , 

The  investments  held  against  Reserve,  Insurance,  and  (if  any)  Depre- 
ciation Funds,  must  be  verified  by  an  inspection  of  the  securities  held. 

This  leads  up  to  the  consideration  of  the  Depreciation  Fund,  which 
must  be  accumulated  by  companies  owning  works  on  leasehold  lands.  The 
case  will  not  often  arise,  but,  when  it  does  occur,  a  suflficient  sum  must  be 
set  aside,  and  invested  to  accumulate  to  the  cost  of  the  works  by  the  time 
the  lease  expires.  The  Auditor  will  require  to  satisfy  himself  as  to  the  suf- 
ficiency of  the  annual  instalments. 

WATER   companies. 

The  audit  of  Water  Companies  is  slightly  simpler  than  that  of  Gas 
undertakings,  by  reason  of  the  fact  that  the  rates  charged  are,  for  the  most 
part,  fixed,  instead  of  fluctuating  with  the  quantity  used.  Such  portion  as 
is  supplied  by  meter,  for  trade  purposes,  will  entirely  follow  the  method 
recorded  under  Gas  Companies.  With  regard  to  the  greater  portion,  which 
is  based  at  a  sliding  scale  upon  the  rateable  value  of  the  houses,  it   is   not- 

36 


usual  to  exhaustively  check  the  calculations  involved,  but  they  should  be 
tested  to  such  extent  as  may  appear  desirable.  Vacancies  should  be  vouched 
for  by  a  declaration  of  the  owner  that  the  property  in  question  has  been 
vacant  for  the  whole  of  the  quarter.  Allowances  (which  should  be  very 
exceptional)  must  be  properly  explained,  while  arrears  and  bad  debts  must 
both  receive  careful  attention. 

Most  companies  are  empowered  to  make  their  rates  in  advance,  and 
consequently  their  books  will,  at  the  date  of  the  accounts,  reveal  a  profit 
that  has  not  yet  been  earned ;  due  allowance  must,  of  course,  be  made  for  this 
in  the  General  Balance  Sheet. 

RAILROAD. 

The  actual  extent  of  the  Auditor's  responsibility  is  a  matter  of  some 
little  uncertainty,  but  it  is  at  least  certain  that  he  is  not  to  be  held  responsible 
for  every  detail  of  the  half-year's  recorded  transactions.  The  audit  of  these 
details  occupies  the  whole  of  the  time  of  the  Chief  Accountant  and  the  audit 
staff;  and  not  only  would  it  be  a  physical  impossibility  for  the  professional 
Auditor  to  go  over  the  whole  of  their  work,  but  it  would  also  be  a  lamentable 
waste  of  time  and  money. 

The  Audit  Office,  in  itself,  constitutes  a  continuous  and  thorough  check 
upon  every  other  department  under  the  supervision  of  the  Accountant,  and, 
as  no  monies  whatever  pass  through  the  office,  it  may  safely  be  taken  that 
the  work  is  honestly  performed. 

The  Auditor's  work  may  thus  be  said  to  commence  with  the  certified' 
returns  of  traffic,  and  the  certified  accounts  of  tradesmen  and  others.  He 
must,  however,  himself  examine  and  verify  the  summaries  of  these  items. 
He  must  see  that  they  tally  with  the  cash  and  bills  received,  and  that  the 
latter  find  their  way  into  the  bank  in  due  course.  He  must  examine  the 
vouchers  of  all  expenditure,  and,  so  far  as  possible,  verify  its  apportion- 
ment; in  particular,  must  he  satisfy  himself  as  to  the  correctness  of  the 
apportionment  of  such  expenditure  between  Capital  and  Revenue.  With 
regard  to  the  issue  of  new  capital,  he  must  see  that  the  arnount  actually 
received  agrees  with  the  totals  shown  in  the  Stock  and  Share  Ledgers  kept 
at  the  secretary's  office.  He  should  compare  the  certified  returns  of  the 
Railway  Clearing  House  and  "Foreign"  Railways  with  the  entries  in  the 
books  of  his  own  company.  He  should  check  the  transactions  in  bills  in 
detail,  follow  the  matured  bills  into  the  Banking  Account,  and  verify  the 
outstanding  bills  by  the  inspection  of  the  actual  documents.  He  must  check 
the' traffic  outstandings  with  the  certified  statements,  examine  the  entries 
on  both  sides  of  the  Banking  Account,  and  check  the  additions ;  and,  so  far 
as  possible,  the  classification  of  the  items.    He  should  examine  all  debentures 

37 


that  have  been  redeemed,  and  see  that  they  hat^e  been  cancelled.  He  should 
vouch  the  payment  of  dividends  and  interest  by  the  original  warrants  pro- 
duced from  the  secretary's  office  for  that  purpose,  and  scrutinise  all  out- 
standing amounts.  He  should  examine  the  accounts  for  repairs  done  to 
the  rolling  stock  of  customers,  and  compare  the  lists  with  the  Ledger.  He 
should  examine  the  accounts  of  rent  received,  thoroughly  check  the  General 
Ledger,  compare  the  balances  of  the  various  Stock  Accounts  with  the 
certified  list  of  stores  on  hand,  compare  the  totals  of  the  General  Ledger 
Expenses  Account  with  the  totals  of  the  subsidiary  books.  It  will  then  still 
remain  for  him  to  ascertain  that  such  liabilities  as  traffic  drawbacks  are 
provided  for,  verify  the  investments  by  inspection  of  securities  and  exam- 
ination of  the  interest  received,  compare  the  capital  issued  with  that  author- 
ised, give  a  final  consideration  to  the  apportionment  of  Capital  and  Revenue 
Expenditure,  and  see  that  the  necessary  certificates  have  been  furnished  as 
to  the  efficiency  of  the  permanent  way,  rolling  stock,  etc. 

Even  after  everything  has  been  done,  it  is  probable  that  the  Auditor 
who  has  had  no  previous  experience  in  Railway  Accounts  will  feel  far  from 
easy  in  his  mind  as  to  the  sufficiency  of  his  examination.  The  skilled  Rail- 
way Auditor  will,  however,  rely  in  a  great  measure  upon  the  look  of  the 
Accounts  submitted  to  him,  and  will  remember  that  he  cannot  reasonably 
be  held  responsible  for  the  honesty  of  the  Accountant — that  must  be  as  much 
taken  for  granted  as  the  honesty  of  the  Auditor  himself. 

SHIPPING  COMPANIES. 

Unlike  the  accounts  of  Railways,  the  accounts  connected  with  marine 
traffic  are  subject  to  no  special  statutory  provisions  with  regard  to  form. 

There  is  no  essential  difficulty  in  connection  with  Shipping  Accounts, 
but  the  fact  that  it  is  both  desirable  and  customary  to  show  the  net  result 
of  every  voyage  of  every  ship  necessitates  some  very  nice  apportionment  of 
the  items  constituting  Shore  Expenses  and  Insurance. 

The  extent  of  an  Auditor's  investigations  will  vary  greatly  in  different 
cases :  In  the  case  of  a  Single  Ship  it  is  desirable  that  the  audit  be  as 
exhaustive  as  possible ;  but  in  the  case  of  one  of  the  larger  Companies  such 
a  course  would  be  quite  as  impracticable  as  in  the  case  of  a  Railway.  The 
actual  extent  in  any  particular  case  will  thus  be  very  largely  a  matter  of 
arrangement  and  of  expediency. 

The  following  considerations  may,  however,  be  safely  submitted,  as 
they  will  in  every  case  require  to  be  dealt  with  in  more  or  less  detail. 

Ascertain  that  freights  and  passage  money  are  duly  accounted  for ;  that 
the  apportionment  of  shore  expenses  is  equitable;  that  the  Cost  Accounts 
are  not  improperly  manipulated   (especial  care  being  required  where  one 

38 


Cost  Account  is  kept  for  a  whole  fleet)  ;  that  only  structural  improvements 
are  debited  to  Cost  Account;  that  proper  depreciation  is  allowed — especially 
in  regard  to  boilers ;  that  outstanding  freights  and  agents'  balances  are  pro- 
vided for  in  accordance  with  the  documentary  evidence;  that  unclaimed 
return  passages  are  in  order ;  that  proper  return  of  insurance  premiums  has 
been  obtained  for  the  time  during  which  any  vessel  has  been  "laid  up,"  and, 
generally,  that  insurance  matters  are  in  order;  that  the  question  of  foreign 
exchanges  has  been  dealt  with  upon  a  proper  basis ;  and  that  no  profits  are 
taken  credit  for  on  account  of  uncompleted  voyages. 

In  order  to  prevent  misunderstanding,  it  seems  desirable  to  point  out, 
for  the  benefit  of  the  reader  who  has  no  experience  of  Shipping  Accounts, 
that  the  ''Cost  Account"  is  really  neither  more  nor  less  than  a  Capital  Ex- 
penditure Account,  and  must  on  no  account  be  compared  with  the  Cost 
Accounts  kept  by  manufacturers. 

Before  leaving  the  subject  of  Shipping  Accounts,  it  is  desirable  to  point 
out  that  some  shipowners,  instead  of  insuring  with  underwriters  against 
risk  of  total  loss  or  damage  to  their  vessels,  raise  an  Insurance  Fund  where- 
with to  meet  such  losses  by  periodical  charges  against  Revenue.  The  effect, 
of  course,  is  that,  instead  of  Profit  and  Loss  being  debited  with  insurance 
premiums,  it  is  debited  with  an  instalment — probably  somewhat  in  excess 
of  that  which  would  have  been  thus  paid — which  is  credited  to  the  Insurance 
Fund.  At  the  same  time,  to  make  the  Insurance  Fund  really  effective  when 
required,  it  is  desirable  that  a  corresponding  amount  of  cash  should  be 
invested  in  readily  realisable  securities,  the  Insurance  Fund  thus  becoming 
for  all  practical  purposes  a  Sinking  Fund,  rather  than  a  mere  reserve.  When 
any  loss  is  incurred,  the  cost  of  replacing  it  is  debited  to  the  Insurance  Fund 
Account,  a  corresponding  amount  of  investments  being  realised  to  provide 
the  necessary  cash.  It  need  hardly  be  pointed  out  that  an  Insurance  Fund 
can  only  become  an  effective  provision  against  loss  in  the  case  of  companies 
owning  a  large  fleet  of  vessels,  so  that  within  their  own  experience  they 
get  a  reasonable  average  of  risk.  Even  here,  however,  it  will  sometimes 
happen  that  a  loss  occurs  which  will  more  than  swallow  up  the  whole  of  the 
accumulated  fund,  and  the  question  then  arises  w^hether  it  is  reasonable  to 
bring  forward  the  debit  balance  of  the  Insurance  Fund  Account  as  an  asset 
upon  the  Balance  Sheet.  If  there  is  a  reasonable  probability  that  this  debit 
balance  can  be  extinguished  out  of  future  instalments  within  a  reasonable 
time,  there  is  probably  no  objection  to  this  course  of  procedure;  but,  in  any 
event,  it  seems  desirable  that  it  should  appear  as  a  special  item  in  the  Balance 
Sheet,  so  that  no  shareholder  may  be  deceived  as  to  the  actual  position  of 
affairs ;  and,  in  addition,  the  Auditor  would  do  no  harm  by  drawing  atten- 
tion to  the  facts  in  his  certificate. 

39 


Single  Ship  Companies  almost  invariably  make  no  provision  for 
depreciation :  the  Auditor  need  not  waste  his  time  upon  any  efforts  to  con- 
vince his  clients  of  the  imprudence  of  this  course,  but  he  should  not  forget 
to  append  the  necessary  qualification  to  his  certificate.  The  Auditor  of 
Single  Ship  Companies  must  bear  in  mind  that,  as  regards  fraud,  there  is 
no  such  thing  as  "safety  in  numbers"  here,  for  the  accounts  are  usually  all 
in  one  person's  hands — let  him,  therefore,  not  omit  to  examine  the  Voyage 
Account  Book  in  detail. 

STREET  railroad. 

Tramway  Accounts  are  usually  prepared  upon  the  "Double  Account" 
system;  permanent  way,  rolling-stock,  and  horses  constituting  the  items  of 
Capital  Expenditure.  With  regard  to  the  first  two  items,  on  account  of  the 
extreme  difficulty  of  making  any  periodical  estimate  of  their  value,  the 
method  adopted  is,  perhaps,  the  most  convenient  one — ^^the  work  being 
maintained  in  a  state  of  perpetual  efificiency  rather  than  r^uced  by  deprecia- 
tion and  increased  by  renewals.  As  regards  "Horses,"  however,  the  unper- 
manent  nature  of  this  item  appears — in  spite  of  the  fact  that  such  a  course 
is  unusual — to  lend  itself  more  readily  to  the  "Single  Account"  method  of 
treatment,  namely,  by  writing  ofT  depreciated  value  and  debiting  the  account 
with  fresh  purchases.  The  certificates  of  the  responsible  officials  must 
always  be  obtained  for  the  efificiency  of  the  assets  represented  by  the  Capital 
Expenditure. 

The  traffic  receipts  must  be  carefully  tested,  and  it  is  not  unusual  for 
the  Auditor  to  consider  it  necessary  for  him  to  go  over  the  whole  of  this 
work  in  detail,  commencing  with  the  tickets,  guards'  books,  or  way-bills 
(as  the  case  may  be),  and  tracing  the  receipts  on  to  the  traffic  sheets  and 
daily  and  monthly  trafific  books,  and  seeing  that  the  whole  amount  received 
has  been  duly  banked.  Where  the  system  employed  does  not  provide  a 
perfect  internal  check,  it  w^ould  seem  to  be  very  desirable  for  the  Auditor 
to  examine  every  detail,  for  it  is  here,  especially,  that  a  leakage  is -likely  to 
occur.  It  may,  perhaps,  seem  superfluous  to  suggest  the  propriety  of  seeing 
that  receipts  are  accounted  for  upon  every  day  of  the  year. 

The  only  other  source  of  revenue  of  any  importance  will  be  advertising ; 
but  as  this  is  almost  invariably  sub-let  to  a  contractor,  it  needs  no  comment. 

The  expenditure — whch  should  always  be  made  by  cheque,  no  payment 
out  of  traffic  receipts  being  on  any  account  permitted — must  be  carefully 
vouched;  while  the  analysis  thereof  must,  so  far  as  possible,  be  verified. 
In  particular  the  apportionment  between  Capital  and  Revenue  must  be 
thoroughly  scrutinised. 

The  Horses  Account  is  one  that  might  easily  be  manipulated,  and  must 

40 


be  particularly  watched ;  the  number  of  horses  shown  on  the  account  should, 
of  course,  agree  with  the  number  stated  on  the  vet.'s  certificate. 

Tramway  statistics  for  short  periods  will  be  of  but  little  value  to  the 
Auditor  as  a  general  check  upon  the  satisfactoriness  of  affairs ;  but  statistics 
of  longer  periods  may  prove  most  useful,  if  intelligently  applied. 

MUNICIPALITIES. 

It  is  the  opinion  of  most  experienced  Auditors  that  no  efficient  audit 
can  be  made  without  an  exhaustive  examination  into  every  detail,  for  the 
transactions  of  local  authorities  are  so  numerous  and  various  that  it  is  im- 
possible to  take  a  bird's-eye  view  of  the  matter.  Thus  the  late  Mr.  Wm. 
Edmonds^  F.C.A.,  F.S.S.,  in  a  lecture  upon  "Corporation  Accounts,"  has 
said  'Tn  my  experience  it  is  the  smaller  items  of  receipts  and  payments  that 
"generally  are  the  most  fruitful  source  for  defalcations  and  irregularities. 
"Non-professional  Auditors  would  pass  over  much  detail,  and  are  fre- 
"quently  content  to  merely  cast  the  Cash  Account  submitted  by  the  Treas- 
"urer,  considering  such  to  be  their  sole  duty." 

The  sinking  fund  instalments  must  in  all  cases  receive  the  Auditor^s 
close  attention :  he  must  satisfy  himself  as  to  their  sufficiency  for  the  redemp- 
tion of  the  loans  within  the  periods  prescribed ;  and  verify  the  investments 
of  the  fund,  both  as  to  principal  and  interest. 

The  actual  significance  of  a  sinking  fund  and  the  method  of  dealing 
with  it  in  the  books  of  a  corporation  are  not  always  so  well  understood  as 
might  reasonably  have  been  expected.  As,  however,  the  principle  is  exactly 
the  same  as  that  described  with  reference  to  insurance  funds  (under  the 
head  of  Shipping  Accounts),  the  matter  need  not  engage  further  attention 
at  the  present  time. 

With  regard  to  the  routine  to  be  adopted  in  any  particular  case,  much 
will  naturally  depend  upon  the  individual  circumstances:  but  the  best  plan 
will  be  to  reproduce  here  the  "Instructions"  prepared  by  the  late  Mr.  F.  R. 
GoDDARD^  F.C.A.,  for  the  audit  of  the  Newcastle-on-Tyne  Corporation  Ac- 
counts. The  standard  here  set  up  is,  doubtless,  a  very  high  one^  but  it  can- 
not be  considered  to  involve  anything  beyond  the  strictest  necessities.  The 
late  Mr.  Wm.  Edmonds,  when  speaking  of  these  pro  forma  instructions, 
said  "In  my  opinion  there  is  nothing  superfluous  contained  in  the  lengthy 
detail  set  forth  by  Mr.  Goddard:  for  myself,  I  have  found  it  absolutely 
necessary  to  check  every  penny  of  receipts  and  payments  before  I  sign  the 


41 


INSTRUCTIONS  FOR  AUDIT. 

MONTHLY  AUDIT. 
TREASURY  DEPARTMENT. 

Cash  Receipts  Pass  Books — Check  additions  of  all  Pass  Books,  and 
see  that  total  receipts  are  signed  for  by  Treasurer,  and  entered  in  Treasurer's 
or  General  Cash  Books.  See  that  the  head  of  each  Department  signs,  the 
Pass  Book  of  his  Department  weekly. 

Departmental  Pass  Books.  No.  of  Books. 

Packoge  Dues 

Cranage  Dues  . ; 

Port  and  Harbour 

New  Streets  Formation 

Materials  Sold 

Manure  Sold 

Work  Done > 

Old  Materials 

Fever  Hospital 

Rents 1 

Rates 1 

Collectors'  Pass  Books  and  Cash  Books — Check  Debits*  of  Pass  Books 
with  Collectors'  Cash  Books.  See  that  the  Collectors'  Pass  and  Cash  Books 
are  initialled  by  Treasury  Clerks.  Check  counterfoils,  Collectors'  Receipt 
Books,  with  their  Cash  Books,  for  two  or  three  weeks  in  each  half-year. 
See  that  Collectors  sign  their  Pass  Books  and  Cash  Books  weekly : 

Cattle  Market  (4),  Cattle  Market  (Accommodation  Pens,  Corn  Mar- 
ket), Concert  Hall,  Cattle  Sanatorium,  Concerts,  Hirings,  Thorough  Toll, 
Butcher  Market  and  Vegetable  Market,  High  Bridge  Female  Lavatory, 
Elswick  Park  (3),  Armstrong  Park  (3),  Branding  Park  (3),  Leazes  Park 
(3),  Sandhill  Weigh  House,  Refunded  Workmen's  Wages. 

Miscellaneous  Pass  Books — See  that  Pass  Books  are  initialed  by  Treas- 
urers' Clerks.     Check  occasional  Counterfoils  with  Pass  Books. 

Baths  and  Wash-houses — Check  Daily  Statement  to  Pass  Book,  and 
see  that  former  are  signed  by  Cashier  and  Superintendent. 

Weights  and  Measures — Check  occasional  Counterfoils  with  Inspector's 
Cash  Book. 

St.  Mary's  School — Check  a  few  entries  in  register  occasionally. 

Hay  Market  Weighage  and  Standage — Check  occasional  Counterfoils. 

Chimney  Sweep  Certificates — Check  Counterfoil  Receipt  Book. 

Pedlars'  Certificates — Check  Counterfoil  Receipt  Book,.  Cabmen's 
Badges,  Science  and  Art  Class  (Public  Library). 

Public  Library — Check  Vouchers  at  Library  occasionally  with  Librar- 
ian's Cash  Book. 

Royal  Grammar  School — Check  Counterfoils  for  pupils'  fees  to  Cash 
Book. 

42 


Town  Hall  Rentals  (Meetings,  &c.) — Check  Counterfoils  and  Diary 
occasionally. 

Organ  Performances — '  do. 

City  Concerts —  do. 

Freemen's  Admission  Fees — Check  Fees  received  with  Freemen's  Ad- 
mission Book  in  Town  Clerk's  Office,  Moor  Small-Pox  Hospital  (Dripping 
Sold),  Leazes  Park  (Skating),  Recreation  Ground  (Skating). 

Lough  and  Noble  Models  (Elswick  Park) — Stick  and  Umbrella  Re- 
ceipts: check  occasional  Counterfoils,  Gas  Meter  Book. 

•  Treasury  Receipt  Books — Check  all  Counterfoils  Receipts  given  by 
Treasurer  to  Treasurer's  Cash  Book.  Check  all  Day  Book  entries  with 
Council  Minutes,  Police  Pay  Bills,  Cattle  Inspector's  Sheets,  and  all  other 
sources  of  information,  and  see  that  the  correct  amounts  are  carried  into  the 
Books.     Cattle  Sanatorium  (Standages). 

Through  Toll  Compositions — North-Eastern  and  North  British  Rail- 
ways. 

Fire  Brigade  Expenses — Proportion  charged  to  Insurance  Companies : 
Call  Fire  Bills  to  Fire  Brigade  Day  Book. 

Services  of  Police  at  Factories — Check  vouchers  to  accounts  and  check 
additions  of  latter. 

Town  Hall  Concert  Room — Letting  of  Hall,  Organ,  &c. 

Hospitals — Funeral  allowances  Repaid. 

Criminal  Prosecutions — Magistrates'  Clerk's  Fees,  Police  Superannua- 
tion Fund  (as  per  Police  Pay  Bills),  New  Road  Baths  (Rent  from  Lessee), 
Gallowgate  Baths  (Rent  from  Lessee),  Northumberland  Baths  (Rent  from 
Lessee),  Home  for  Incurables  (Garden  Rent),  Explosive  Licenses  (issued  by 
Town  Improvement  Committee),  Freemen's  Admission  (fees  to  Treasurer), 
Cemetery  Company  (Dividends  on  Shares),  Scotswood  Bridge  Company 
(Dividends  on  Shares),  Old  Horses  sold.  Quay  Shed  Rents  (List  from 
Quaymaster  weekly,  not  included  in  Genex"cil  Rents),  Tramways  (Lessees' 
Rent),  R.  Thompson's  Becj.^st  Fund  (Loans  Repaid),  Sir  T.  White's 
Bequest  Fund  (Loans  Repaid),  Education  Rate  (Precepts  on  Overseers), 
Gaol  Rate  (Precepts  on  Overseers),  Town  Moor  Intakes  (collected  for 
Freemen),  Slaughter  Houses  Licenses,  Deposit  Tickets  (Rubbish),  Virgin 
Mary  Hospital  (contribution  to  Grammar  and  St.  Mary's  Schools),  Library 
Rate  by  (Precept  on  Overseers),  Lunatic  Asylum  (Mr.  Pace,  Treasurer, 

Miscellaneous  Receipts  (Interest,  &c.).  See  that  all  Dividends  and  In- 
terest on  Funds  invested  for  the  year  are  received  and  entered  in  Cash  Book. 

Police  Superannuation  Fund,  Dale  Scholarship,  Meikle  Schlorship — 
Interest  Forms,  Transfers  by  Cheque.  Interest  on  Coal  Dues,  Money,  &c. 
Receipts  given  on  Receipt  Forms;  transfers  by  Cheque. 

43 


H.M. — Treasury — Police  Claims,  Criminal  Prosecutions,  use  of  Police 
Van.     Receipts  on  Special  Forms  supplied  by  Government. 

Magdalene  Hospital — Dividends  on  Consols  per  Bankers. 

School  Grants — per  Bankers  on  Government  Forms. 

Property  Sold  and  Enfranchised — ^per  Order  of  Council  and  by  Deed 
enrolled. 

Town  Moor  Purchase  Account  and  Tyne  Bridge  Trust  Fund — Divi- 
dends on  Consols. 

Corporation  3>^  %  Stock — Check  Stock  Bank  Book  v^ith  General  Cash 
Books. 

CASH   PAYMENTS. 

Voucher  Guard  Book — Call  Vouchers  and  Wages  Sheets  to  General 
Cash  Books,  stamping  each  voucher,  and  taking  out  list  of  missing  vouchers 
in  the  Note  Book.  Bonds  paid  off  and  Conveyances  of  Property  purchased 
to  be  produced  as  Vouchers.  See  that  all  Bonds  paid  off  are  properly 
discharged.  See  that  Wages  Sheets  are  signed  by  City  Engineer  and 
Surveyor. 

Watching — Police  Pay  Bills — Call  Pay  Sheets  to  Cash,  checking  sepa- 
rate Pay  Sheets  to  total  sheets. 

Bank  Pass  Book — Call  Bank  Pass  Book  to  General  Cash  Books  and 
check  last  Reconciliation,  showing  cheques  outstanding  and  in  hands  of 
Treasurer  at  date,  checking  those  in  hands  of  Treasurer  with  Counterfoil 
Cheque  Books. 

Treasurer's  Petty  Cash  Book — Check  additions,  and  see  that  there  is 
£150  in  hand.  Count  Cash  in  hand  half-yearly,  after  giving  credit  for  sums 
paid  after  last  meeting  of  Committee. 

Treasurer's  Cash  Book — Check  credits  to  debit  of  General  Cash  Books. 
Check  additions. 

General  Cash  Books  (3) — Check  additions. 

Reconciliation  of  Payments  with  Committee  Minutes — Check  total 
payments  in  Cash  Books  to  monthly  Reconciliation.  Check  Finance  and 
all  other  Committee  Minute  Books  to  Book  containing  record  of  all  cheques 
drawn,  and  see  that  the  total  payments  in  the  Cash  Book  agree  with  total 
amount  of  cheques  drawn  during  the  month,  excepting  cheques  in  the 
hands  of  Treasurer,  which  have  not  been  entered  in  Cash  Book  nor  paid 
away  at  that  date,  wHich  must  be  produced  to  the  Auditors. 

DEPARTMENTAL    MONTHLY    AUDIT. 
TOWN    IMPROVEMENT    DEPARTMENT. 

New  Streets  Formation — Cash  Book.  Check  all  Counterfoils  of  Receipt 
Books  for  Cash  received  at  the  office,  'and  also  all  Counterfoils  of  Collector's 

44 


Receipt  Books  to  Cash  Books.  Check  Receipts  in  Cash  Book  to  Treasurer's 
Pass  Book. 

Rate  Department — Check  a  few  entries  here  and  there  in  Collector's 
Cash  Books  to  Treasurer's  Pass  Book.  See  that  Clerk  from  Treasury 
Office  initials  the  Collector's  Cash  Books  as  having  been  checked  by  him. 

General  Rents  Cash  Book-^Check  additions  of  Cash  Book. 

St.  Mary  Magdalene  Cash  Book — Check  additions  of  Cash  Book. 

Package  Dues  Department — Check  all  Counterfoil  Receipts  from  Mer- 
chants and  Wharfingers  (2  Books)  with  Cash  Book.  Verify  any  exceptional 
allowances  wilh  documents  relating  thereto.  Call  Counterfoil  Receipts 
for  commissions  to  Wharfingers'  Book  and  check  additions.  Call  Cash  to 
Pass  Book  and  check  additions. 

Port  and  Harbour  Dues — Call  Counterfoils,  Quaymaster's  Receipt 
Book  to  Cash  Book,  Cash  Book  to  Pass  Book,  and  check  additions. 

Cranage  Dues — Check  Counterfoils  to  Pass  Book,  thence  to  Cash  Book, 
and  check  additions. 

HALF-YEARLY   AUDIT. 
TOWN  IMPROVEMENT  DEPARTMENT. 

New  Streets  Formation — Cash.  Call  all  work  charged  during  the 
period  under  audit  from  the  Minutes  and  Estimates  to  the  Day  Book.  Call 
Cash  Book,  Day  Book,  and  Allowances  Book  to  Ledger.  Check  additions 
of  all  books  and  extraction  of  balances  half-yearly,  proving  their  accuracy 
by  totals.  Examine  arrears  and  take  particulars  of  different  classes  of  same 
yearly. 

Old  Materials  Sold — Check  Book  in  Surveyor's  Office  with  Invoices. 
Call  Day  Book  and  Cash  Book  to  Ledger  and  check  all  additions.  Check 
and  prove  balances  and  note  arrears. 

Manure — Check  yard  sheets  with  Day  Book  in  Surveyor's  Office,  one 
here  and  there  as  a  test.  See  that  all  allowances  are  duly  authorised  by 
Committee.  Call  Day  'Book,  Cash  Book,  and  Allowance  Book  to  Ledger. 
Check  all  additions  and  extraction  of  balances  and  prove  same  by  totals  in 
Reconciliation.    Note  arrears  yearly. 

Work  Done  and  Materials  Sold — Check  occasional  entries  in  Time  and 
Materials  Sheets  to  test  correctness  of  Day  Book  entries.  Call  Day  Book, 
Cash  Book,  and  Allowance  Book  to  Ledger.  Check  all  additions,  prove 
balances  and  note  arrears. 

Fever  Hospital — Check  Register  with  Admission  and  Discharge  Books. 
Call  Register  to  Day  Book,  Day  Book  and  Cash  Book  to  Ledger.  Prove 
balances  and  check  all  additions. 

Rate  Department — Check  rates  made  with  Council  Minutes,  and  see 

45 


that  Rate  Books  are  signed  by  the  Mayor  and  Town  Clerk  with  Corporar 
tion  Seal  affixed.  Call  Counterfoil  Receipts,  which  have  not  been  used, 
to  Irrecoverable  Arrears  Column  in  the  Rate  Books,  and  note  any  arrears 
written  off  for  which  no  cancelled  receipt  is  produced.  Check  additions 
( I  in  every  3  pages).  Check  summaries,  and  see  that  the  total  cash  received 
has  been  paid  over  to  the  Treasurer.  Check  General  Summary  in  All  Saints' 
Book,  and  also  half-yearly  Statement  prepared  by  Mr.  Pybus. 

RENTS   DEPARTMENT. 

Rent  Rolls — Check  occasional  counterfoils  for  General  Rents,  and  ex- 
amine a  few  Tenants'  Rent  Books  and  Collectors'  Collecting  Books  for 
Tenement  and  Market  Rent  by  way  of  test  each  half-year.  Check  one  week's 
receipts  each  half-year,  and  see  that  the  total  rents  received  agree  with  the 
total  cash  paid  over  to  Treasurer  during  that  week.  Check  Council  Minute 
Book,  Engineer's  Tenancy  Book,  Seal  Book,  Assignment  Book,  and  Treas- 
ury Minute  Book  to  Rent  Minute  Book  and  Day  Book,  to  ascertain  any 
alteration  for  General  and  Magdalene  Rents.  Call  all  entries  in  Rents 
Minute  Book  and  Day  Book  to  Rent  Rolls  as  follows :  General  Rent  Roll, 
Magdalene  Rent  Roll,  Tenement  Rent  Roll,  Willington  Tenement  Rent  Roll, 
Butcher  Market  Rent  Roll.  Check  New  Rent  Rolls  each  year  with  that  of 
previous  year,  and  see  that  all  alterations  to  close  preceding  year  are  made 
in  new  Rent  Roll.  Check  additions  and  Reconciliation  in  General  Rent  Roll. 
Check  additions  of  all  Rent  Rolls,  prove  Summaries,  and  check  same  to 
General  Rent  Roll  Reconciliation. 

General  Refits  Cash  Book — Check  receipts  to  Tenant's  Pass  Book. 
Check  additions  of  Cash  Book.  Check  Summary  of  Cash  to  Reconciliatipn 
in  General  Ledger  and  Enfranchisement  Sales  Ledger. 

General  Rents  Ledger  and  Liberties  Ledger — Check  half-year's  rents 
charged  to  tenants,  and  see  that  all  differences  agree  with  Minute  Books 
and  Day  Books.  Check  the  following  Books  with  Ledgers :  Empties  Book, 
Rates  and  Taxes  Book,  Arrears  Book,  Balance  Book  (yearly).  Check 
additions  of  these  books  and  totals  to  Reconciliation  at  end  of  General 
Ledger. 

St.  Mary  Magdalene  Cash  Book — Check  receipts  to  Pass  Book,  and 
check  Summary  to  Reconciliations  in  General  Ledger  and  Enfranchise- 
ment Sales  Ledger. 

St.  Mary  Magdalene  Rent  Ledger — Check  half-year's  rents  charged  to 
tenants,  and  see  that  all  differences  agree  with  Minute  Books  and  Day 
Books.  Check  the  following  Books  with  Ledgers:  Empties  Book,  Rates 
and  Taxes  Book,  Arrears  Book,  Balance  Book  (yearly).  Check  additions 
of  these  Books  and  totals  to  reconciliation  at  end  of  General  Ledger. 

46 


Enfranchisement  and  Sales  Ledger — Check  interest  for  half-year,  and 
check  balances,  arrears,  rates  and  taxes,  and  carry  to  Reconciliation  at 
end  of  Ledger. 

Paving  and  Flagging  Ledger — Check  half-year's  charge  and  check 
balances. 

PACKAGE    DUES    DEPARTMENT. 

Check  Register  of  Vessels  arrfving  and  sailing  to  Declarations  of  Cargo.- 
Call  Declarations  of  Cargo  (see  that  Manifests  are  signed)  to  Manifest 
Summary,  and  check  Manifest  Summary  additions.  Call  Cash  Books,  Allow 
ance  Book,  and  Commission  Book  to  Ledger  and  check  additions.  Call 
Ledger  to  Balance  Book,  check  additions  of  latter,  and  prove  total  amount  of 
balance  by  totals  of  the  various  books,  as  shown  in  the  Reconciliation  State- 
ment ;  make  copy  of  Reconciliation.  Check  transfers  from  Mr.  Pace's  Cash 
Book  to  Mr.  Harvey's  Petty  Cash  Book,  and  check  additions  of  Petty  Cash 
Book.  Check  transfers  from  Petty  Cash  Book  to  Stamp  Book,  and  check 
additions  of  Stamp. Book. 

PORT  AND   HARBOUR  DUES. 

(Rent  of  Goods  impounded  by  Quaymaster.) 
Call  Cash  Book  and  Day  Book  to  Ledger.     Check  additions  of  Ledger 
and  check  Balances  to  Balance  Book.     Check  the  Quaymaster's  record  of 
Goods  impounded  daily  with  the  Day  Book. 

CRANAGE  DUES. 

Check  sheets  certified  by  Mr.  Laws  to  Day  Book.  Call  Day  Book  to 
Journal,  Journal  to  Ledger,  Cash  to  Ledger,  Call  Allowance  Book  to  Ledger 
and  check  additions  of  all  Books.  Call  Ledger  balances  to  Balance  Book. 
Check  Balance  Book  additions. 

TOWN  clerk's  office. 

Check  Vouchers  and  all  Deeds,  &c.,  for  Stamps  charged  into  Cash  Book, 
and  make  a  note  of  any  missing.  Check  from  Counterfoil  Receipt  Book 
and  Bills  of  Cost  Book  to  debit  of  Cash.  Check  Sales  of  Parliamentary 
and  Municipal  Registers  with  Counterfoils,  Fees  on  Leases  for  75  years 
with  Seal  Book,  Fees  for  Bonds  under  Thompson  and  White's  Bequests 
with  Loans  granted,  Fees  for  Freemen's  Certificates  of  Birth  with  Guild 
Book,  Fees  for  affixing  Mayor's  Seal  to  Affidavits  and  Foreign  Documents 
with  Register  of  same,  and  Fees  for  Freemen's  Admissions  to  Freemen's 
Admission  Minute  Book.  See  that  total  receipts  and  payments  agree  with 
transfers  in  general  Books. 

47 


magistrates'  clerk's  office. 
(This  Audit  to  be  done  on  Wednesdays.)  Check  Rough  Cash  Book  to 
Cash  Book  of  Apportionment,  and  check  latter  to  Daily  Summary  Book 
and  latter  to  Monthly  Summary. Book  signed  by  the  Clerk.  Check  Vouchers 
of  payments  to  Treasurer,  and  see  that  same  agree  with  Magistrates'  Clerk's 
Monthly  total.    Check  additions  of  all  Cash  Books. 

COUNCIL  MINUTES. 

Finance  Committee  Minutes — Read  through  Council  Minutes,  checking 
into  Seal  Book  all  Bonds,  Mortgages,  Assignments,  &c.,  and  taking  notes 
of  all  Cash  transactions  passed  by  the  Council,  and  extract  all  Minutes 
relating  to  Special  Grants  and  payments,  increase  in  Salaries,  &c.,  from 
Council  and  Finance  Committee  Minutes;  also  Town  Improvement,  Watch, 
Sanitary,  Town  Moor-  Management,  Schools  and  Charities,  Public  Libraries 
and  Parks  Committee  Minutes.  See  that  Council  and  Committee  Minute 
Books  are  signed  by  Mayor  and  Chairman  of  Committees  respectively. 

Seal  Book — Check  with  and  from  Council  Minute  Book  all  entries  in 
Seal  Book,  Call  to  General  Rents  and  Magdalene  Hospital  Rents  Day  Book 
all  new  Leases,  Assignments,  &c.,  also  to  Bond  Book  and  Stock  Registers, 
New  Loans  to  the  Corporation,  ticking  the  latter  to  the  left  of  the  amount. 

STOCK  REGISTERS. 

Redeemable,  Irredeemable,  Holder,  Bearer — Check  money  paid  from 
Cash  Book,  ticking  to  the  right  of  the  amount."  Check  Duplicate  Stock 
Certificates  issued  to  Stock  Registers.  ♦  Check  Transfer  Deeds  to  Transfer 
Registers  and  call  latter  to  Stock  Registers,  and  check  total  of  Ledger 
balances  to  Summary.  Check  all  certificates  issued  to  Council  Minutes  and 
Seal  Book.  Check  balances  of  Stock  Ledger  to  List  of  Stockholders,  and  see 
that  total  agrees  with  Summaries  of  Stock  Registers  at  25th  March  (yearly). 

Bond  Book — Check,  with  Cash  Book  the  Cash  received  for  new  Loans, 
ticking  to  the  right  of  the  amount.  Check  Loan  repayments  into  Cash  Book 
and  compare  same  with  yearly  Ledger,  and  see  that  the  correct  balance  is 
brought  down  and  carried  forward  each  year. 

LEDGERS. 

Capital  and  Special,  General  Rate,  City  Fund,  Intermediate  and  Trust 
Accounts — Call  Cash  and  Transfer  Journal  Posting  and  check  additions. 
Check  balances  at  29th  September  and  25th  March. 

Treasury  and  Bequest  Ledger — Call  Postings  of  Treasury  Cash  Book, 
Miscellaneous  Day  Book,  Sanatorium  Day  Book,  Allowances  and  Fire 
Brigade  Day  Books  to  Treasury,  and  Bequest  Ledgers  (Thompson  and 
White).     Check  all  additions  and  extraction- of  balances.     Check  Summary 

48 


of  Cash  Receipts  and  Payments  and  Cash  Balances  at  29th  September  and 
25th  March. 

Outstanding  Accounts  and  Allowances  in  Treasurer's  and  New  Streets 
Departments — Check  half-yearly  Statement  of  Accounts  and  Arrear 
Book  (2). 

Note — Chief  Clerk  to  examine  all  Pass  Books  and  Collectors'  Cash 
Books  at  the  close  of  half-year,  and  see  that  they  have  been  checked  and 
initialled  by  Treasury  Clerks,  and  that  the  Audit  Instructions  have  been 
properly  carried  out  in  each  case.  Chief  Clerk  to  initial  each  Pass  Book 
and  Cash  Book,  with  date  when  examined  by  him. 

YEARLY    AUDIT. 

St.  Mary  Magdalene  Ho-spital,  Cash  Book — Check  additions,  and  see 
that  total  agrees  with  Balance  Account  in  Ledger. 

Package  Dues,  Cash  Book — As  above. 

Public  Libraries,  Ledger  and  Cash  Book — As  above. 

Lunatic  Asylum — Check  balance  forward  from  previous  year.  Check 
amount  receivable  for  the  year  current  from  the  Precepts  and  Minute 
Book.  Check  amount  received  from  the  Counterfoil  Receipt  Book.  Check 
Bank  Account,  vouch  all  payments.  Check  balance  forward  and  all  additions. 

Securities  for  Invested  Funds — Check  Securities  in  hand  of  Town  Clerk 
and  Treasurer. 

Accountant's  Department — Check  Statement  of  Assets  and  Liabilities 
with  Ledger.  Check  Redemption  of  Stock,  Borrowed  Money,  Borrowing 
Powers. 


Since  the  first  edition  of  this  work  appeared,  the  attention  of  the  pro- 
fession has  been  very  prominently  directed  to'  the  great  diversity  of  the 
forms  in  which  the  accounts  of  corporations  are  stated.  Many  of  the  varia- 
tions to  be  found  are  mere  differences  of  detail  that  need  not  be  considered 
here;  but,  on  the  other  hand,  many  corporations  adopt  a  form  that  seems 
to  be  quite  opposed  to  all  principle,  and  such  forms  are  of  course  to  be 
resisted. 

It  is  thought  that  the  published  accounts  of  every  corporation  should  show 
{inter  alia)  an  Account  of  Income  and  Expenditure  and  a  Balance  Sheet  for 
each  separate  department  or  fund,  and  also  an  Aggregate  Balance  Sheet. 
The  desirability  of  following  this  course  is  not  likely  to  be  questioned — 
it  remains  only  to  discuss  the  form  that  the  Balance  Sheet  should  take. 
The  forms  at  present  in  use  are  most  diverse,  but  they  may  (disregarding 
details)  be  said  to  be  all  based  upon  one  or  other  of  the  following  principles :. 

( I )     All  classes  of  capital  expenditure  are  treated  as  assets,  and 

49 


(a)  Perpetually  maintained  at'  cost. 

(b)  Written  off  as  the  loans  are  repaid. 

(c)  Written  off  as  the  value  becomes  reduced  by  effluxion  of 

time. 

(d)  Re- valued   periodically,   and   the   difference   charged   to 

revenue. 

(2)  Only  Realisable  Assets  are  included  in  the  Balance  Sheet  as 
assets,  the  subsequent  treatment  being  as  before. 

(3)  Only  Revenue-bearing  Assets  are  included  in  the  Balance  Sheet 
as  assets,  the  subsequent  treatment  being  as  before. 

It  is  strongly  contended  that  ( i )  is  the  only  true  principle,  and  that  the 
subsequent  treatment  should  be  upon  the  lines  of  either  (a)  or  (c)  :  both 
(b)  and  (d)  are  regarded  as  unscientific  in  method  and  false  in  principle. 
With  regard  to  the  choice  between  (a)  and  (c),  the  balance  of  advantage 
appears  to  be  in  favour  of  the  former;  that  is  to  say,  it  is  considered  that 
the  double  account  system  is  more  suitable  to  this  class  of  accounts  than  the 
single-account  system.  It  is,  however,  clearly  desirable  that  obsolete  or  non- 
existent assets  should  always  be  written  out  of  the  account,  and  attention 
should  be  directed  to  this  point  at  every  audit. 

The  more  recent  volumes  of  The  Accountant  contain  much  that  is  of 
interest  and  value  in  relation  to  Municipal  Accounts,  and  it  will  be  found 
that  the  view  there  advocated  is  the  one  now  recommended  by  the  present 
writer.  The  position  is  shortly,  but  fairly  completely,  set  out  in  an  article 
that' appeared  in  that  journal  on  the  23rd  March,  1895.  This  article  con- 
cludes as  follows: 

There  can,  we  think,  be  but  little  doubt  that  the  accounts  of  all  local 
authorities  (which,  for  convenience  sake,  we  describe  under  the  term  "Mu- 
nicipal Accounts")  should  be  so  framed  as  to  contain  the  fullest  information 
possible  in  the  most  intelligible  form.  This  being  granted,  it  further  follows 
that  not  only  is  it  desirable  that  the  outstanding  indebtedness  of  the  munici- 
pality should  be  clearly  shown,  together  with  the  amount  of  loans  redeemed, 
but,  further,  that  the  accounts  should  show,  with  equal,  clearness,  the  exact 
manner  in  which  the  whole  of  such  loans  have  been  expended,  and  the 
residual  value  which  may  fairly  be  said  to  remain  as  an  asset.  We  do  not, 
of  course,  suggest  that  every  kind  of  expenditure  for  which  a  Corporation 
may  be  permitted  to  borrow  is,  of  necessity,  in  the  nature  of  an  asset,  but 
it  is  at  least  in  the  nature  of  capital  expenditure,  and  should,  we  think,  be 
so  treated  in  the  accounts ;  and  our  own  view  is  that  the  General  Accounts 
should  not  be  complicated  by  any  question  of  depreciation,  except  in  relation 
to  works  that  are  not  of  a  permanent  character — or  in  relation  to  works 

50 


which,  while  treated  as  capital  expenditure,  in  the  sense  that  a  Corporation 
is  permitted  to  borrow  upon  them,  are  really  in  the  nature  of  revenue  ex- 
penditure extended  over  a  term  of  years  ecjual  to  the  time  given  for  the 
repayment  of  the  loan.  With  these  exceptions  we  think  that  the  total 
expenditure  should  be  brought  forward  from  year  to  year  in  exactly  the 
same  manner  as  it  would  be  in  the  case  of  a  railway  or  any  other  undertaking 
upon  the  double-account  system,  the  consequent  effect  of  which  would  be 
that  all  loans  extinguished  (less  ''temporary"  capital  expenditure  written 
off)  would  appear  upon  the  General  Balance  Sheet  as  a  surplus.  Perhaps 
some  more  appropriate  name  than  ''surplus"  might  have  to  be  found  for 
this  balance,  but  we  think  that  the  items  of  which  we  suggest  that  it  should 
be  composed  are  the  most  appropriate  items  to  appear  as  the  difference  be- 
tween the  two  sides  of  the  General  Balance  Sheet.  Supplemental  Capital 
Expenditure  Accounts  might,  and  indeed  should,  we  think,  be  added,  marsh- 
alling the  various  items  of  capital  expenditure,  first  into  the  headings  of  the 
various  departments,  and  secondly  under  some  such  headings  as  those 
advocated  by  Mr.  Guthrie.  These  might  conveniently  be  set  forth  in 
tabular  form,  as  giving,  perhaps,  the  maximum  of  information  and  clearness 
combined. 

The  question  as  to  whether  or  not  depreciation  should  be  provided  for 
is  one  which  has  already  been  discussed,  but  upon  which  more  might  yet  be 
profitably  said.  We  are  not  sure  that  a  sufficient  case  has  been  made  out  to 
establish  the  necessity  for  a  different  treatment  from  that  which  obtains  in 
the  case  of  railway  companies.  Doubtless,  like  railway  companies,  munici- 
palities would  often  require  to  create  some  reserve,  even  if  it  did  not  appear 
in  their  accounts  expressly  as  depreciation;  but,  from  whatever  point  of 
view  the  matter  is  regarded,  there  can,  we  think,  be  nothing  more  illogical 
than  the  method  adopted  by  some  Corporations  of  depreciating  their  assets 
at  such  a  rate  that,  when  the  loans  out  of  which  such  assets  were  created  are 
redeemed,  these  assets  will  have  been  written  down  to  zero  in  the  accounts. 
In  the  case  of  the  older  loans  and  stocks,  where  a  very  long  period  for  re- 
demption was  permitted,  there  might  very  easily  be  some  sort  of  connection 
between  the  rate  of  redemption  and  the  rate  of  depreciation ;  but  loans  now 
authorized  have  frequently  to  be  repaid  in  such  periods  that  it  is  obviously 
the  intention  of  the  Local  Government  Board  and  the  Legislature  to  arrange 
matters  so  that  the  whole  loan  shall  be  redeemed  some  considerable  time 
bfore  the  asset  has  ceased  to  possess  a  value.  Consequently,  to  adhere  in  the 
accounts  to  a  rate  of  depreciation  which  is  equal  to  the  rate  of  redemption 
required  for  the  indebtedness,  is  to  adhere  to  a  system  which  not  only  fails 
to  exhibit  the  actual  facts  of  the  case,  but  also  fails  to  express  what  was 

51 


obviously  the  intention  of  the  authorities  authorising  the  issue  of  the  loans. 

MUNICIPAL  GAS,  WATER  AND  ELECTRIC  LIGHT  WORKS. 
— These  accounts  must  not  be  dismissed  without  at  least  a  few  words  of 
notice.  The  Act  or  Order  authorizing  the  particular  undertaking  must,  of 
course,  be  carefully  perused,  but  a  few  general  considerations  obtain. 

The  question  has  been  raised  (and,  it  might  be  added,  discussed 
ad  nauseam)  as  to  whether  local  authorities  should  or  should  not  set  aside 
a  sum  for  depreciation  in  addition  to  sinking  fund  instalments.  It  has  been 
ingeniously  contended  that  the  sinking  fund  instalment  is  required  to  be 
set  aside  "out  of  profits,"  or  (if  there  be  no  profits)  out  of  the  rates,  and  that 
no  profits  can  exist  until  depreciation  has  been  provided  for.  Few  terms 
are  more  elastic  than  the  term  "profit,"  but  it  may  be  remarked  that  the 
profits  divisible  among  the  shareholders  of  a  gas  company  are — according  to 
the  statutory  form  of  accounts — noi  arrived  at  after  an  allowance  for  depre- 
ciation has  been  deducted.  It  would  appear  that  the  modus  operandi  here 
sanctioned  (viz.,  to  maintain  the  efiiciency  of  the  works  out  of  revenue,  but 
to  keep  the  Capital  Expenditure  Account  intact)  is  equally  applicable  to  the 
accounts  of  similar  undertakings  in  the  hands  of  local  authorities. 

In  dealing  with  the  audit  of  these  accounts,  however,  care  must  be  taken 
to  inquire  into  the  sufficiency  of  the  sinking  fund  instalments  and  into  their 
due  investment. 

EXECUTORS'  AND  TRUSTEES'  ACCOUNTS.— It  will  some- 
times happen  that  the  professional  accountant  is  called  upon  to  audit 
the  accounts  of  executors  or  trustees,  on  behalf  of  some  dissatisfied  bene- 
ficiary. 

The  purport  of  the  Auditor's  investigation  in  such  cases  will  be  to 
ascertain  that  the  terms  of  the  will  or  trust  have  been  complied  with,  and  that 
no  improper  use,  or  unauthorised  investment,  of  the  trust  funds  has  occurred. 
Questions  of  apportionment  between  Capital  and  Income  will  also  claim  his 
attention. 

The  fullest  investigation  into  details  will  be  necessary,  except  perhaps 
where  the  trustees  have  been  authorised  to  carry  on  the  testator's  business, 
and  there  is  no  suggestion  that  their  conduct  has,  in  this  respect,  been 
improper. 

In  addition  to  the  will  and  probate,  and  the  accounts  kept  by  the  execut- 
ors and  trustees,  the  Probate  Account  (with  any  subsequent  corrective 
accounts) — or  its  more  modern  equivalent — and  Residuary  Account,  to- 
gether with  the  Minute  Book  (if  one  be  kept)  and  al  Idocuments  and  vouch- 
ers, will  require  to  be  carefully  examined. 

With  regard  to  the  question  of  apportionment,  it  is  important  to  remem- 

52 


ber  that  all  interest  accrued  to  the  date  of  death  forms  part  of  the  corpus; 
that  the  profit  or  loss  arising  from  any  subsequent  bona  fide  change  of  invest- 
ment falls,  as  regards  capital,  upon  capital,  and  as  regards  income,  upon 
income;  that,  even  where  investments  of  a  wasting  nature  are  specially 
authorized,  the  whole  of  the  income  does  not  pass  to  the  life-tenant — the 
usual  custom  being  to  consider  four  per  cent,  as  income,  and  to  capitalise 
the  remainder  (.see  various  recent  decisions);  that. any  loss  arising  out 
of  an  unauthorised  investment  falls  upon  the  trustees  personally,  who  are 
liable  to  repay  the  amount  with  such  interest  as  the  Court  may  direct — the 
rate  being  usually  four  per  cent,  (simple  interest),  except  where  the  trus- 
tees have  applied  the  funds  to  their  own  use,  when  a  higher  rate  is  generally 
charged.  Any  of  the  above  provisions,  may,  however,  be  modified  by  the 
special  terms  of  the  will  or  other  instrument  creating  the  trust. 

It  is  also  important  to  remember  that  benefi'ciaries,  unless  of  full  age, 
have  no  power  to  consent  to  any  variation  in  the  terms  of  the  will. 

It  may  sometimes  occur  (in  fact,  it  has  occurred)  that  a  trustee,  carry- 
ing on  the  business  of  his  testator,  has  depreciated  the  goodwill  by  attracting 
the  customers  to  his  own  (similar)  business.  It  would,  however,  be  very 
difficult  to  establish  a  liability  against  the  trustee  in  such  a  case,  except  upon 
the  face  of  the  most  convincing  evidence. 

Ir^  conclusion,  it  need  hardly  be  pointed  out  that  one  of  the  most 
important  duties  in  these  audits  consists  of  a  very  careful  verification  of 
the  investments. 

ACCOUNTS  OF  INSTITUTIONS.— (a)  CHARITIES— Under 
this  head  may  be  considered  the  accounts  of  Hospitals,  certain  endowed 
Schools  and  Almshouses,  and  similar  institutions. 

In  the  early  part  of  1890  a  Committee  of  the  Charity  Organization 
Society  appointed  a  sub-committee,  consisting  of  four  well-known  Chartered 
Accountants,  to  enquire  into  the  best  methods  of  preparing  and  auditing 
the  accounts  of  Charitable  Institutions.  A  full  report  of  the  sub-committee 
(including  specimens  of  the  forms  of  accounts -recommended)  appeared  in 
Volume  XVI.  of  The  Accountant,  and  should  be  studied  by  all  persons  inter- 
ested, but  it  does  not  appear  to  be  of  sufficient  general  importance  to  neces- 
sitate its  reproduction  in  this  work.  It  should  be  mentioned,  however,  that 
the  report  urges  the  importance  of  a  Balance  Sheet  being  submitted  by  all 
Institutions  owning  property,  and  of  a  proper  Income  and  Expenditure 
Account  being  submitted  by  all  Institutions  having  current  liabilities  at  the 
date  of  their  accounts. 

With  regard  to  Endowed  Charities,  certain  statutory  provisions  obtain ; 


but  inasmuch  as  they  do  not  practically  affect  the  Auditor's  position  it  has 
not  been  thought  necessary  to  include  them  in  the  Appendix. 

The  distinguishing  feature  of  most  charities'  accounts  is  the  receipt 
of  subscriptions  and  donations.  These  will,  of  course,  require  to  be  vouched 
in  the  usual  way ;  but,  perhaps,  the  most  effective  check  consists  in  the  pub- 
lication of  a  list  of  subscribers  and  donors  along  with  the  accounts. 

Another  important  point  is  that  charities  are  not  liable  for  income  tax ; 
it  should,  therefore,  be  seen  that  none  has  been  paid,  and  that  the  tax 
deducted  from  dividends  received  upon  investments  has  been  refunded. 

The  following  extracts  from  the  'instructions  for  the  guidance  of 
Secretaries,"  prepared  by  the  before-mentioned  sub-committee,  will  form 
an  appropriate  conclusion  to  this  section: 

"i. — Where  Form  I.  [a  simple  Receipts  and  Payments  Account]  Is 
used,  the  Cash  Book  should  be  kept  upon  a  columnar  method,  so  that  the 
analysis  appearing  in  the  Teasrurer's  Cash  Statement  may  be  easily  followed 
by  the  Auditors. 

"2. — Where  a  Banking  Account  is  kept,  all  cash  balances  should  be 
paid  into  the  Bank  on  the  last  day  of  the  period  to  be  reviewed. 

"3. — A  list  of  all  books  kept  by  the  Institution  should  be  handed  to  the 
Auditors,  all  the  books  being  open  to  inspection. 

"4. — In  Forms  II.  and  III.  (involving  an  Income  and  Expenditure 
Account)  the  accounts  should  be  kept  in  Ledger,  opening  in  the  form  in 
which  they  will  be  presented  in  various  financial  statements. 

"6. — The  Books  should  be  balanced  and  the  Statements  for  audit 
prepared  prior  to  the  visit  of  the  Auditors. 

"7. — All  Deeds  and  other  Securities  should  be  kept  in  a  Deed  Box  at 
the  Institution's  Bankers,  the  box  having  three  locks,  the  keys  of  which 
should  be  held  respectively  by  the  Treasurer,  Secretary,  and  another  member 
of  the  governing  body. 

"9. — Before  going  to  press  the  prlnter^s  proof  of  the  Subscription  Lists 
and  Accounts  should  be  examined  by  the  Auditors. 

''11. — All  vouchers  of  payment  should  be  arranged  In  the  order  of  the 
dates  of  payment  prior  to  the  audit. 

12. — All  Bankers'  Pass  Books,  made  up  to  the  end  of  the  period 
under  review,  should  be  at  hand  at  the  time  of  audit." 

Many  of  these  points  do  not  relate  solely  to  Charities'  Accounts,  but 
wijl  be  found  useful  at  all  times ;  they  are,  however,  mentioned  in  this  con- 
nection because  they  appear  to  indicate  the  lines  upon  which  the  audit 
."••hould  run. 

(b)     CHURCHES. — In  many  respects  the  audit  of  Church  Accounts 

54 


is  a  peculiarly  thankless  task.  Apart  from  the  fact  that  they  are  hardly 
ever  submitted  to  the  Auditor  in  anything  approaching  proper  form,  it  is 
almost  invariably  the  case  that  no  effective  internal  supervision  is  exercised, 
and  frequently  large  sums  will  pass  through,  say,  a  verger's  hands  without 
any  proper  check  being  kept  upon  his  dealings. 

The  Auditor  must  check  everything  he  can,  and  try  to  teach  his  clients 
the  elements  of  commercial  caution;  but  it  is  probable  that  he  will  never 
feel  quite  happy  with  a  church  audit.  The  writer  well  remembers,  upon  one 
occasion,  being  refused  permission  to  count  a  balance  of  over  £ioo  (prac- 
tically a  running  balance)  that  was  in  the  hands  of  the  verger:  not  long 
afterwards — but,  nevertheless,  after  repeated  warnings — the  suspicions  of 
the  vicar  were  at  length  aroused,  and  the  verger  was  instructed  to  pay  his 
balance  into  the  bank.  It  seems  unnecessary  to  add  that  he  was  unable 
to  do  so. 

Church  Schools  receiving  a  Government  grant  are  required  to  keep 
an  account  of  all  receipts  and  payments  in  the  prescribed  (columnar)  form. 
Such  account  is  made  up  annually  and  summarised  upon  a  statement  which 
for  some  occult  reason  is  called  the  Balance  Sheet.  This  statement  (of 
which  a  duplicate  copy  must  be  furnished)  has  to  be  signed  by  the  Treas- 
urer and  the  Auditor,  and — together  with  the  Cash  Book  and  all  vouchers 
— submitted  to  the  Government  Inspector  upon  the  date  appointed  for  his 
visit..  It  is  not  necessary  to  produce  vouchers  for  subscriptions  received, 
nor  yet  for  small  payments;  but  it  is  important  to  remember  that,  if  the 
accounts  are  not  in  order,  payment  of  the  grant  of  the  Education  Depart- 
ment will  be  delayed. 

(c)  COLLEGES  AND  SCHOOLS.— These  accounts  call  for  but  little 
comment.  The  usual  method  of  audit  may  be  said  to  consist  of  a  "cross" 
between  that  employed  in  ''Charities"  and  ''Hotels"  (q.v.),  but  it  may  be 
added  that  only  a  detailed  audit  is  Hkely  to  be  found  entirely  satisfactory. 

Many  University  Colleges  are  subject  to  the  Statutes  made  by  the 
Commissioners  appointed  under  the  Universities  Act  1877,  under  which  duly 
audited  accounts  have  to  be  submitted  to  the  University.  In  most  cases  a 
tax  is  payable  upon  the  amount  of  income  received. 

Endowed  Schools  are  nominally  under  the  control  of  the  Charity 
Commissioners,  to  whom  copies  of  the  Annual  Accounts  should  be  for- 
warded. The  principal  point  to  be  remembered  is  that  the  Governors  have 
no  power  to  apply  the  corpus  of  the  endowment  to  current  purposes. 

BUILDING  AND  FRIENDLY  SOCIETIES,  ETC.— (a)  BUILD- 
ING SOCIETIES. — The  enormous  number  of  frauds — some  of  them  of 
disastrous  proportions — that  have  occurred  in  the    accounts    of    Building 

55 


Societies   within   the  last  few  years  should  suffice  to  make  the  Auditor  of 
these  accounts  more  than  usually  cautious. 

The  great  majority  of  frauds  that  have  been  committed  have  remained 
undetected  by  reason  of  the  very  superficial  examination  bestowed  upon  the 
accounts  by  the  Auditors;  but  cases  have  occurred  in  which  the  most  detailed 
audit  (conducted  by  unskilled  men  truly,  but  none  the  less  detailed  on  that 
account)  has  failed  to  detect  anything  wrong." 

The  author's  experience  of  Building  Society  Accounts — and  these 
remarks  apply  equally  to  every  class  of  accounts  included  under  this  heading 
— has  convinced  him  of  the  extreme  importance  of  checking  every  addition, 
posting,  and  voucher,  of  carefully  verifying  every  amount  received  in  re- 
demption of  mortgages  or  paid  out  to  investing  shareholders,  of  comparing 
every  Pass  Book  with  the  Ledgers,  and  both  with  the  lists  of  balances,  and 
of  testing  the  latter  at  considerable  length  in  respect  of  the  calculation  of 
interest.  The  income  received  from 'properties  on  hand  must  be  verified  in 
every  possible  way ;  and,  where  such  income  does  not  seem  to  be  a  fair  return 
upon  the  book-value  of  the  various  properties,  the  latter  should  be  either 
revised  or  supported  by  a  Surveyor's  valuation. 

The  deeds  relating  to  all  mortgages,  and  the  securities  relating  to 
whatever  other  investments  there  may  be,  must  also  be  examined  by  the 
Auditor,  who  will  do  well,  in  addition,  to  require  the  solicitor  to  certify  that 
such  deeds  are  all  in  order. 

It  must  also  be  remembered  that  there  is  a  statutory  limit  to  the  bor- 
rowing powers  of  a  society,  which  must  not  be  exceeded.  Another  point  to 
be  borne  in  mind  is  that  the  Balance  Sheet  and  accounts  are  now  required 
to  be  kept  in  such  form  as  the  Registrar  of  Friendly  Societies  may  prescribe. 

It  is  more  than  probable  that  the  fees  attaching  to  his  office  will  afford 
the  Auditor  no  adequate  remuneration  for  an  examination  conducted  on 
such  lines  as  those  laid  down;  but,  be  this  as  it  may,  the  Auditor  who — • 
under  ordinary  circumstances — omits  any  of  the  precautions  named  would 
be  worse  than  foolish. 

(c)  SAVINGS  BANKS. — The  remarks  in  connection  with  the  ac- 
counts of  Building  Societies  will  apply,  so  far  as  they  are  relevant,  with 
equal  force  to  the  accounts  of  Savings  Banks.  The  examination  of  all  the 
Pass  Books  is  a  most  important  feature,  and  it  must  not  be  forgotten  that 
there  is  a  statutory  limit  both  to  the  amount  standing  to  the  credit  of  any 
one  depositor,  and  to  the  amount  that  may  be  paid  in  by  a  depositor  in  any 
one  year. 

The  books  of  the  bank  may  be  taken  to  comprise — 

(a)  In  all  cases,  Deposit  Ledgers  with  one  or  more  daily  Cash  Books, 

56 


or  other  record  of  the  individual  cash  transactions  with  depositors.  These 
books,  at  least,  must,  therefore,  necessarily  be  examined  not  less  than  once 
each  half-year  to  comply  with  a  minimum  requirement  of  the  Act  of  Parlia- 
ment. 

(b)  In  certain  cases,  a  General  Ledger  and  General  Cash  Book,  or 
cash  summaries,  in  wdiich  the  totals  of  the  daily  transactions  are  periodically 
worked  up  to  show  the  aggregate  sums  deposited  and  repaid. 

From  the  reports  received  the  examination  of  the  detailed  cash  records 
does  not  appear  so  thorough  as  might  be  desired,  though  doubtless  there 
may  be  a  considerable  amount  of  examination  not  mentioned  by  the  Audi- 
tors in  their  reports,  nor  referred  to  in  the  reports  of  the  inspectors. 

This  is  especially  noticeable  in  the  checking  of  the  daily  additions  of 
these  books,  or  schedules,  in  the  regular  checking  of  the  cash  remittances  to. 
the  treasurer  by  a  reference  to  the  Bank  Pass  Book,  and  of  the  cash  balance 
by  actual  enumeration.  Although  there  may  be  some  details  of  examination 
which  have  not  been  defined  in  the  Auditors'  reports,  the  statistics  obtained 
do  not  convey  any  very  great  assurance  that  the  scrutiny  brought  to  bear 
upon  the  Cash  Books  by  the  Auditors  in  the  majority  of  cases  is  a  searching 
one,  and  it  would  thus  appear  that  in  many  instances  the  audit  in  this  respect 
ought  to  be  supplemented. 

The  examination  of  the  Deposit  Ledgers,  ^n  the  other  hand,  appears 
to  be  much  more  complete,  notably  the  detailed  postings  from  the  Cash 
Book.  The  additions  and  subtractions  in  the  Ledgers,  it  is  true,  come  in 
for  but  a  small  share  of  attention;  butthe  verification  of  Pass  Books,' so  far 
as  it  extends,  is  a  test  of  the  accuracy  of  these  operations,  as  well  as,  to 
some  extent,  of  the  postings.  The  calculation  and  addition  of  interest  is 
decidedly  a  weak  point  in  the  management  of  banks  w^here  there  is  only 
one  paid  officer.  Though  checking  these  items  can  hardly,  in  ordinary  cir- 
cumstances, be  held  to  be  the  function  of  an  'auditor,  still  the  Auditor  seems 
at  times  to  be  the  only  person  available  to  test  their  accuracy.  Unless  the 
Auditor  does  it,  no  independent  check  is  brought  to  bear  upon  the  items  of 
interest  at  banks  where  only  one  paid  officer  rs  employed,  and  errors  in  cal- 
culation are  apt  to  remain  undetected.  Any  such  defect  should  be  seen  to, 
even  if  some  additional  expense  is  incurred  thereby;  the  cost  to  be  met, 
where  necessary,  by  corresponding  economies  in  other  items  of  Management 
Expenses. 

The  most  marked  feature  of  a  Savings  Bank  Audit  appears  to  be  the 
examination  of  the  lists  of  balances  extracted  from  the  Deposit  Ledgers. 
Two  hundred  and  tw^enty-five  Auditors  certify  that  they  have  checked  this 
independently,  and  eleven  that  they  have  done  so  with  the  aid  of  some  mem- 

57 


ber  of  the  staff  of  the  bank,  a  test  that  is  not  usually  sufficiently  independent 
to  be  safely  relied  upon.  The  importance  of  this  operation  will  be  appre- 
ciated when  it  is  remembered  that  in  most  banks  the  total  of  the  list  is  the 
only  independent  evidence  of  the  aggregate  liability  of  the  trustees  to  the 
depositors,  and  it  is  necessary,  therefore,  to  enable  the  Auditor  to  give  a 
true  certificate  as  to  the  amount  of  liabilities  and  assets.  It  also  furnishes 
a  check  upon  the  accuracy  of  the  postings  in  the  Deposit  Ledgers  in  the 
aggregate.  As  a  check  upon  fraud  the  list  is  of  little  worth,  unless  made 
accessible  to  depositors,  and  even  then,  before  it  can  be  put  to  much  use, 
it  is  necessary  to  give  every  publicity  to  the  existence  and  purpose  of  this 
volume  by  means  of  proper  notices.  Little  reliance  ought,  therefore,  to  be 
placed  on  this  statutory  check  upon  fraud. 

As  a  rule,  *'the  books  of  the  bank"  include  a  General  Ledger  and  Gen- 
eral Cash  Book  in  the  larger  and  better  managed  and  audited  Banks  only, 
but  we  suggest  that  such  books  should  be  adopted  by  all  Savings  Banks, 
large  and  small.  These  books,  or  corresponding  summarised  statements, 
should  be  made  up  not  less  frequently  than  once  a  month,  and  ought  to  be 
checked  by  the  Auditor  throughout  in  all  respects  as  to  additions,  transfers, 
and  postings,  either  continuously  month  by  month  (where  a  visit  of  such 
frequency  is  possible),  or  at  other  longer  intervals. 

Other  books  of  account  relate  to  Stock  business,  in  which  there  is  but 
little  scope  for  error  of  any  serious  moment. 

Auditors^  Reports. — Our  experience  during  the  past  three  years 
shows  that  a  clear  report  in  writing,  not  less  frequently  than  once  every 
half-year,  has  not  always  been  given,  a  minority  of  banks  being  still  content 
with  an  annual  report  only. 

List  of  Balances. — As  already  stated,  the  examination  of  this  list  is 
usually  well  attended  to. 

Certificate  of  Liabilities  and  Assets. — This  requirement. can  now 
in  all  cases  be  conveniently  complied  with  by  the  Auditor  certifying  the 
Annual  General  Statement  of  Account  (which,  as  last  amended,  contains  a 
form  of  Balance  Sheet),  as  having  been  examined  and  found  correct. 

Book  of  Balances. — As  mentioned  already,  this  bpok  should  bear  a 
clear  certificate  as  to  its  accuracy.  At  nearly  all  banks  it  is  so,  but  some 
cases  still  occur  where  the  accuracy  of  this  book  is  either  not  certified  by 
the  Auditor,  or  is  certified  by  implication  only. 

The  double  check  upon  cash  transactions  with  depositors  appears  to  be 
complete  and  to  be  completely  recorded  at  204  banks  out  of  the  236.  Of 
these  204,  182  record  the  use  of  the  double  check  in  two  independent  Cash 
Books,  while  22,  having  only  one  Cash  Book,  post  the  Ledgers  at  the  time 

58 


from  the  entries  in  the  Pass  Book,  thus  recording  each  transaction  in  two 
ways  before  the  Pass  Book  leaves  the  bank.  This  method,  although  it 
might  serve  to  trace  any  discrepancy  in  balancing  the  cash,  does  not  afford 
a  check  on  the  total  of  the  cash  transactions  for  the  day.  It  is  only  in  use 
as  a  rule,  however,  in  the  smallest  banks;  but,  to  make  it  more  complete, 
the  accounts  operated  upon  might  be  marked  by  inserting  tags  or  other 
markers  in  the  Ledgers,  and  the  postings  should  be  checked  with  the  Cash 
Book,  and  the  Cash  Book  summed  a  second  time  before  the  business  of  the 
day  is  concluded.  The  removal  of  all  the  tags,  or  other  markers,  from 
the  Ledgers  would  show  when  all  the  postings  had  been  checked. 

The  double  check  is  wanting,  or  is  insufficiently  recorded,  in  32  cases 
out  of  the  236. 

Valuable  assistance  in  the  work  of  audit  is  occasionally  rendered  by 
the  trustees  and  managers,  either  acting  individually  or  by  forming  them- 
selves into  small  audit  committees.  In  the  former  manner  a  trustee  or 
manager,  willing  to  personally  undertake  some  detail  of  audit,  could  most 
usefully  direct  his  attention  to  the  examination  of  Pass  Books  with  the. 
Ledgers  of  the  bank.  The  work  of  an  audit  committee  would  more  espe- 
cially be  valuable  in  connection  with  the  examination  of  the  Cash  Book,  and 
of  monthly  or  other  statements  of  business  done.  This  would  be  particularly 
the  case  at  banks  where  it  is  not  usual  for  the  Auditor  to  undertake  more 
than  a  half-yearly  or  quarterly  audit,  apart  from  any  continuous  examina- 
tion of  Pass  Books  that  he  may  be  called  upon  to  make. 

We  deem  it  of  essential  importance  that  the  rules  of  all  Savings  Banks 
should  make  provision  for  the  following  matters : — 

"(a)  For  the  examination  of  Pass  Books  during  the  year  as  pre- 
sented by  depositors  and  their  comparison  with  the  Ledgers  to 
the  extent  of  10  per  cent,  of  those  extant,  either  by  the  Auditor 
or  by  some  other  independent  person  or  persons. 

(b)  For  the  examination  by  the  Auditor  of  the  annual  general  state- 
ment and  its  certification  by  him,'if  found  correct.  If  he  is  not 
satisfied,  the  Auditor  should  report  accordingly  to  the  trustees 
and  manager^;. 

(c)  For  the  Auditor  to  render  occasionally,  when  desired,  a  list  of 
work  done  by  him  in  the  course  of  his  audit." 

The  above  extracts  are  of  value,  as  showing  the  usual  practice,  in  addi- 
tion to  that  which  experience  has  shown  to  be  desirable. 

(b)  STOCKBROKERS. — A  considerable  amount  of  mystery  appears 
to  envelop  Stock  Exchange  Accounts,  and  the  remark  has  frequently  been 

59 


made  that  the  audit  of  Brokers'  and  Jobbers'  Accounts  is  altogether  too 
technical  a  matter  to  be  safely  conducted  by  the  general  practitioner.  The 
advantage  of  special  practical  knowledge  on  the  part  of  the  Auditor  has 
already  been  freely  admitted  by  the  author,  but  it  is  contended  that  the  desir- 
able knowledge  may  be  readily  obtained,  even  by  the  general  practitioner ; 
and,  with  Stock  Exchange  Accounts  in  particular,  it  is  suggested  that  the 
necessity  of  ''specialism"  has  been  greatly  exaggerated. 

For  the  audit  of  these  accounts  to  be  of  any  value,  however,  it  is  neces- 
sary that  it  should  be  of  the  most  detailed  description ;  the  danger  of  error 
or  fraud — either  of  which  might  assume  alarming  proportions — is  extremely 
great,  and  the  utmost  care  and  circumspection  are,  therefore,  imperative. 
Particular  attention  should  be  directed  to  the  Name  Ledger,  and  Continua- 
tions must  also  be  carefully  traced.  The  question  of  ''splits"  should  also 
be  kept  in  mind,  as — although  not  a  large  item — it  is  a  likely  source  of  petty 
fraud. 

Perhaps  the  chief  danger  in  this  class  of  audits  lies  in  the  fact  that,  in 
the  great  majority  of  offices,  there  exists  no  regular  system > affording  a 
reliable  internal  check,  and  no  efficient  supervision.  To  remedy  this  obvious 
weakness  the  visits  of  the  Auditor  should  be  frequent,  say,  at  least  once 
during  each  account;  indeed — although  what  we  have  called  a  "completed" 
audit  is  doubtless  useful,  as  affording  a  reliable  periodical  statement  of 
accounts — the  only  really  efficient  audit  of  Stock  Exchange  Accounts  would 
appear  to  be  one  that  is  both  detailed  and  continuous. 

(c)  ARCHITECTS. — The  accounts  of  Architects  are,  perhaps,  less 
frequently  the  subject  of  professional  audit  than  either  of  the  two  classes  of 
.  accounts  just  discussed,  but  this  is  a  state  of  affairs  which  is  always  unde- 
sirable, and  particularly  so  in  cases  where  two  or  more  architects  are  prac- 
tising in  partnership. 

The  accounts  do  not,  as  a  rule,  involve  a  particularly  voluminous  record, 
-  and  it  is  therefore  desirable  that  in  all  cases  the  audit  should  be  a  detailed 
one.  The  fact  that  architects  are  frequently  not  business  men  makes  it  im- 
portant that  the  Auditor  should  take  every  precaution  to  guard  his  client 
from  loss,  both  through  actual  fraud  and  bad  book-keeping ;  it  is  therefore 
important  for  him  to  see  that  every  item  in  the  Cash  Book  is  properly 
vouched,  and,  so  far  as  possible,  that  all  fees  and  commissions  are  duly 
accounted  for.  It  may  be  mentioned  here  that,  with  regard  to  fees  payable 
able  by  way  of  a  commission,  at  the  uniform  rate  of  5  per  cent.,  upon  the 
value  of  the  work  done,  as  certified  by  the  architect  for  the  purpose  of 
assessing  the  payments  to  be  made  on  account  to  the  builder.  There  will 
always,  at  balancing  time,  be  a  considerable  amount  of  accruing  fees,  which 

60 


must  be  treated  as  an  asset,  but  which  are  not  actually  due  for  payment  at 
the  time;  a  schedule  of  these  items  should  be  prepared  and  certified  by  the 
principals  for  inclusion  in  the  accounts. 

Another  point  that  must  not  be  lost  sight  of  is  that,  in  all  important 
undertakings,  a  ''Clerk  of  the  Works"  is  appointed  to  be  on  the  spot,  for 
the  purpose  of  checking  the  material  and  workmanship  employed  by  the 
builder.  The  Clerk  of  the  Works  is  not  infrequently  appointed  by  the 
architect,  but  he  is  invariably  paid  for — and  is  the  servant  of — the  archi- 
tect's client;  if,  therefore,  for  reasons  of  convenience,  his  salary  has  been 
paid  by  the  architect,  it  is  important  to  see  that  it  is  subsequently  recovered 
bv  him. 


til 


Extracts  From  the 

American  Business  and  Accounting 

Encyclopaedia^ 


The  following  extracts  from  The  American  Business  and  Accounting 
Encyclopaedia  are  republished  with  a  view  to  making  this  text-book  as 
complete  as  possible  to  those  who  may  desire  to  purchase  it  separately. 

AUDIT. — The  examination  of  books  of  account  to  determine  their 
accuracy,  and  the  honesty  of  those  interested. 

The  objects  of  an  audit  have  been  defined  as  follows: 

1.  The  detection  of  technical  errors. 

2.  The  detection  of  errors  of  principle  which  do  not  affect    the 

accuracy  of  the  figures. 

3.  The  detection  of  fraud. 

Another  authority  states  that  the  principles  which  should  govern  an 
audit  are : 

1st.  The  obvious  prijnciple,  that  the  books  should  be  thoroughly 
examined  and  found  to  be  in  balance  and  all  payments  correctly  vouched. 
In  my  humble  opinion,  no  partial  audit  of  a  company's  affairs  is  satisfactory. 

2nd.  An  exhaustive  survey  of  the  results  from  past  standpoints 
(where  there  are  any),  and  any  serious  discrepancy  noted  with  a  view  to 
careful  inquiry. 

3rd.  An  intelligent  and  conscientious  review  of  the  assets  (and  upon 
these  an  auditor  of  any  experience  and  ability  to  gather  information  ought 
to  form  some  definite  opinion),  in  order  to  ascertain  to  the  best  of  his  judg- 
ment the  true  financial  position.  It  is  clearly  laid  down  that  where  the  ser- 
vices of  an  outside  and  independent  valuer  are  employed,  the  auditor  cannot 
go  behind  his  certificate,  but  I  suggest  that  in  his  report  he  should  set  out 
the  fact  of  an  outside  valuation.  But  it  appears  to  me  that  the  auditor  is 
not  wise  to  accept  the  certificate  of  anyone  inside  the  company,  without 
making  such  examination  as  is  possible,  within  the  bounds  of  his  experience. 

F.  N.  Yarwood,  Fellow  Sydney  Institute  of  Accounts,  N.  S.  Vv''.,  says : 

"The  auditor  is  appointed  to  see  that :  ( i )  Tlie  balance  sheet  is  correct. 
(2)  That  it  states  the  position  as  clearly  as  possible.     (3)  That  the  direc- 

62 


tors,  etc.,  have  carried  out  their  duties  in  a  bona  fide  manner  to  the  share- 
holders, and  with  due  regard  to  the  objects  and  intentions  of  the  company. 

AUDITING. — The  method  employed  or  work  performed  in  accom- 
plishing an  audit. 

The  Scope  of  an  Audit. — In  considering  this  subject  we  have  to  take 
into  account  the  fact  that  it  has  by  no  means  been  authoritively  defined  as  to 
exactly  what  an  efficient  audit  should  cover.  There  has  been  considerable 
diversity  of  opinion  as  to  the  extent  of  probing  which  the  term  "auditing" 
should  embrace,  some  maintaining  that  an  audit  should  trace  every  entry 
to  its  original  source,  while  others  consider  the  verification  of  the  trial 
balance  from"  the  books  to  be  sufficient.  It  is  often  very  difficult  to  convince 
a  merchant  of  the  value  of  the  work  for  which  he  will  be  called  upon  to 
pay,  and  in  such  cases  what  may  be  termed  ''a  condensed  method  of  audit- 
ing" may  be  used,  which  will  of  course  be  subject  to  modifications  made  to 
suit  the  special  conditions  encountered.  Such  a  condensed  method  of  audit- 
ing will  be  hereafter  described  in  detail. 

Checking  Postings  to  Ledger. — A  great  many  auditors  consider  it 
necessary  to  check  in  detail  the  postings  to  the  individual  accounts  receivable 
and  payable,  but  it  is  usual  in  this  country  to  take  the  ground  that  if  the 
general  or  representative  accounts  are  found  correct,  no  manipulation  of 
the  individual  or  personal  accounts  could  remain  undetected.  The  auditor 
does  not  devote  any  time  to  satisfying  himself  that  a  bill  of  goods  bought 
by  John  Jones  has  been  charged  in  error  to  John  Smith.  When  John  Smith 
gets  the  bill  he  will  promptly  attend  to  the  rectification  of  the  error.  The 
postings  to  customers  and  purchase  accounts,  however,  are  checked  in  bulk. 
The  auditor  satisfies  himself  that  the  total  amount  of  charges  called  for  by 
the  sales  book  has  gone  into  the  ledger,  as  also  the  total  amount  of  credits 
called  for  by  the  cash  book,  etc.  As  the  trading  statement  will  show  the 
gross  and  net  sales  and  purchases,  there  is  very  little  chance  of  falsifying 
the  merchandise  account  so  that  the  falsification  will  not  be  detected. 

Books  to  be  Audited. — These  will  comprise  customers'  ledgers,  pur- 
chase ledger,  general  or  private  ledger,  cash  book,  petty  cash  book,  cross- 
entry  journal,  purchase  journal,  sales  journal,'  credit  journal,  pay  roll,  bills 
receivable  book,  bills  payable  book,  trial  balance  book,  and  any  other  extra- 
ordinary book,  or  books  of  original  entry,  from  which  postings  may  be 
made  to  the  ledger,  or  the  totals  of  which  may  be  transferred  from  the  aux- 
iliary books  to  a  book  from  which  postings  are  made  to  the  ledger.  The  im- 
portance of  paying  attention  to  the  last  mentioned  detail  can  be  illustrated 
by  an  accountant's  experience  in  an  audit  where  it  was  only  accidentally  dis- 
covered that  the  book-keeper  used  an  auxiliary  or  "blotter"  cash  book,  from 

63 


which  he  transferred  each  day  the  items  to  the  regular  cash  book,  from 
which  they  were  posted  to  the  ledger.  This  "blotter"  being  examined,  a 
comparison  with  the  regular  cash  book  disclosed  the  fact  that  the  book- 
keeper had  changed  the  entries  so  that  for  years  he  had  been  putting  in  his 
pocket  not  less  than  $io  every  day,  making  fictitious  credits  to  conceal  the 
defalcation  in  the  ledger,  said  credits  being  duly  entered  in  the  journal. 

Statistical  Reports  and  Exhibits. — From  the  books  above  men- 
tioned, the  auditor  compiles  the  following  statements  and  exhibits,  which, 
as  a  rule,  will  cover  all  the  desired  information.  Where  investigations  are 
made  for  a  special  purpose  the  whole  trend  of  the  audit  will  naturally  be 
directed  along  the  special  line  and  special  statements  will,  in  all  probability, 
be  required: 

1.  Trial  balance  at  commencement  of  period  covered  by  audit. 

2.  Trial  balance  at  close  of  period  covered  by  audit. 

3.  Trial  balance  after  closing  the  books. 

4.  Balance  sheet,  or  statement  of  assets  and  liabilities. 

5.  Trading  statements.     Departmentalize  as  much  as  possible. 

6.  Profit  and  loss  account. 

7.  Analysis  of  expense  account  and  comparative  statement  when 
possible. 

8.  Statement  showing  analysis  of  Merchandise  account  as  appearing 
on  the  ledger  (where  a  Merchandise  account  is  carried). 

9.  List  of  bad  or  suspense  accounts. 

10.  Schedule  of  Bills  Receivable. 

11.  Schedule  of  Bills  Payable. 

12.  Schedule  of  Missing  Vouchers. 

Check  Marks. — It  is  usual  for  the  auditor  to  use  a  distinctive  check 
mark  by  which  he  can  readily  distinguish  his  completed  work.  Some 
accountants,  however,  state  that  they  make  a  point  of  accomplishing  their 
work  without  placing  a  mark  of  any  kind  upon  the  books  audited.  This 
seems,  however,  to  be  a  very  risky  method  and  would  not  be  advisable  unless 
the  books  audited  were  in  the  sole  charge  of  the  auditor  during  the  exam- 
ination. Particularly  is  this  true  where  books  of  account  are  subject  to  a 
partial  audit  which  is  supposed  to  keep  the  work  as  much  as  possible  up 
to  date  until  the  accounts  receive  their  final  checking.  In  order  to  prevent 
alterations  being  made  after  the  books  have  been  checked  in  this  way,  some 
accountants  adopt  a  special  form  of  check-mark  upon  all  figures  upon  which 
a  correction  rrfay  appear.  They  afterwards  look  back  over  their  work  for 
corrections,  erasures  or  alterations  in  order  to  see  that  nothing  of  the  kind 
appears  without  the  special  check-mark.     This  special  check-mark  should 

64 


be  as  much  like  the  regular  check-mark  as  possible,  so  that  the  book-keeper 
may  not  recognize  the  distinction. 

Cash  and  Bank. — The  first  task  of  an  auditor  upon  undertaking  an 
audit  is  usually  to  check  the  cash  account  both  on  hand  and  at  bank  accord- 
ing to  the  balance  shown  in  the  cash  book.  If  some  time  has  elapsed  since 
the  books  were  closed,  add  to  the  cash  balance  on  hand  the  footings  of  all 
disbursements  since  that  date,  deduct  the  footing  of  the  receipts,  and  the 
balance  should  agree  with  the  cash  on  hand  at  date  of  closing  as  shown  by 
the  cash  book.  It  should  be  particularly  noted  that  no  check  for  currency 
has  been  drawn  but  not  entered  on  the  cash  book  for  the  purpose  of  making 
up  the  amount  which  should  be  on  hand. 

An  audit  is  much  facilitated  when  all  receipts  are  deposited  in  the  bank,' 
and  in  any  case  it  is  useful  to  compare  deposits  made  in  bank  with  the 
receipts  as  shown  by  the  cash  book  for  the  purpose  of  locating  any  large 
differences  which  need  investigation.  It  has  often  happened  that  dishonest 
cashiers  have  deposited  amounts  in  the  bank,  omitting  to  enter  same  on  the 
books,  thus  enabling  them  to  appropriate  a  similar  amount  from  the  receipts 
which  are  entered  on  the  books. 

Purchase  Accounts. — It  has  been  indicated  above  that  accounts  with 
creditors  are  frequently  checked  in  bulk  and  not  in  detail.  It  will,  however, 
be  necessary  for  the  auditor  to  take  particular  notice  that  there  has  been 
no  opportunity  to  charge  purchases  for  employes  to  merchandise  or  expense 
accounts. 

Vouchers. — The  auditor  should  call  for  vouchers,  not  only  for  every 
expenditure  entered  on  the  cash  book,  but  also  for  credits  and  allowances 
entered  on  the  journal,  the  latter  being  fruitful  ground  for  entries  made  to 
cover  defalcations.  There  should  also  be  vouchers  for  deductions  from  the 
amounts  of  customers'  bills  for  freight,  discount,  etc.  In  a  well  ordered 
office  such  deductions  are  always  O.  K.M  by  a  responsible  person  who  guar- 
antees their  accuracy  to  the  auditor.  The  vouchers  should  be  turned  over 
to  the  auditor  in  order  of  date,  and  it  Is  best  also  that  they  should  be  in 
numerical  order.  This,  however,  comes  under  the  head  of  improvements 
which  an  auditor  can  generally  suggest  In  his  report. 

Discount. — Where  the  information  can  be  readily  ascertained  the 
auditor  will  allow  for  the  usual  cash  discounts  on  both  sales  and  purchases 
In  making  up  his  statements.  Trade  discounts  must  always  be  deducted, 
but  this  class  of  accounts  is  usually  posted  to  the  ledger  "net." 

Fraudulent  Errors. — The  detection  of  Irregularities  forms  a  large 
part  of  an  auditor's  duty,  and  he  must  always  be  on  the  watch  for  "clues'* 
which  may  lead  to  discoveries. 

65 


Customers'  Accounts. — In  cases  of  suspected  embezzlement  of  col- 
lections, statements  should  be  mailed  to  all  customers  with  a  request  that 
they  verify  the  balance  shown  as  owing. 

Arbitrary  Entries. — One  of  the  most  trying  conditions  encountered 
by  the  auditor  is  when  transfers  are  made  from  one  account  to  another 
without  originating  from  any  book  of  original  entry  or  when  simple  postings 
are  made  in  the  same  manner.  Such  entries  must  necessarily  cause  a  large 
amount  of  trouble  and  the  auditor  will  know  how  to  deal  with  them  in  his 
report.  The  proprietor  of  a  business  should  promptly  deal  with  such  mat- 
ters, as  it  is  he  who  pays  the  bill. 

Location  of  Errors. — The  detection  of  irregularities  in  books  of 
account  forms  a  large  part  of  the  duties  of  the  auditor  and  accountant,  the 
auditor  exclusively  employed  by  a  large  corporation,  or  the  independent 
public  accountant. 

One  of  the  peculiarities  of  accounting  in  the  United  States  commercial 
houses  is  that  they  prefer  to  have  their  books  made  of  a  paper  on  which 
erasures  can  easily  be  made  without  detection.  Any  sign  of  erasures,  there- 
fore, should  be  considered  with  suspicion,  and  the  entries  carefully  followed 
up  checked  back. 

The  transfer  of  footings  from  page  to  page  should  also  be  carefully 
watched,  as  this  is  a  frequent  hiding  place  for  peculations.  It  is  a  very 
common  trick  with  fraudulent  book-keepers  or  cashiers  to  bring  footings 
forward  accurately  in  the  first  place  until  the  cash-book  has  been  scrutinized 
by  the  proprietor.  After  he  has  found  everything  all  right,  he  is  not  likely 
to  look  at  those  particular  entries  or  that  particular  page  again,  and  the 
footings  brought  forward  can,  therefore,  be  safely  reduced  on  the  receipt 
side  or  increased  on  the  payment  side. 

Vouchers  should  be  demanded  for  all  payments  entered  in  cash  book  or 
petty  cash  book,  and  also  for  all  journal  credits  to  customers,  etc.,  such 
vouchers  to  be  properly  O.  K.M  by  some  responsible  official  who  at  the  time 
was  cognizant  of  the  transaction.  Six  months  hence  no  person  in  the 
business  will  be  able  to  recollect  why  certain  payments  were  made  if  no 
receipts  can  be  found  for  same,  or  no  authorized  vouchers.  A  system  of 
vouchers  for  journal  credits  should  always  be  instituted  for  the  reason  that 
receipts  may  be  diverted  into  the  book-keeper's  pocket  and  entered  in  the 
journal  as  a  credit  for  goods  returned,  or  for  all  allowances,  or  something 
of  that  kind.  An  embezzlement  is  more  frequently  connected  with  a  clever 
manipulation  of  merchandise  account  than  with  anything  else. 

Deductions  from  remittances  on  account  of  freight,  expressage  or  dis- 

66 


count  are  frequently  taken  advantage  of,  the  amounts  of  said  deductions 
being  increased  and  the  amount  of  the  remittance  decreased.  These  petty 
frauds  are  extremely  difficult  to  locate,  and  can  only  be  checked  up  by  filing 
remittance  letters  as  vouchers  in  order  of  date,  so  that  even  if  all  such 
letters  are  not  compared  with  the  entries  a  judicious  selection  can  be  made 
which  will  probably  determine  the  fact  as  to  whether  the  entries  are  correct. 

Another  favorable  location  for  embezzlement  is  in  the  pay  roll  of  a 
large  manufacturing  concern,  unless  proper  precautions  and  safeguards  are 
adopted.  It  will  be  found  quite  possible  to  overcharge  the  wages  earned 
by  workmen  who  are  in  collusion  with  the  superintendent,  to  insert 
"dummy"  names,  or  for  the  cashier  himself  to  foot  up  the  pay  roll  suffici- 
ently incorrectly  to  give  him  a  "rake-off"  when  he  enters  the  wages  paid  in 
the  cash  book.  The  proper  method  of  preventing  defalcations  of  this  kind  is 
to  have  a  complete  system  of  record  from  the  time  the  workman  enters  the 
factory  until  he  leaves ;  an  automatic  machine  to  register  his  arrival ;  a  job 
record  book  in  which  a  clerk  will  register  the  work  he  is  engaged  on;  a  cost 
ticket  on  which  the  workman  will  enter  time  occupied  and  material  used  on 
each  job;  cost  summary  from  which  another  clerk  will  make  up  the  total 
labor  from  the  cost  cards  and  the  amount  due  each  workman ;  a  pay  roll  book 
to  be  kept  by  another  clerk  which  shall  bring  the  labor  of  the  different  jobs 
together  for  each  man,  and  will  show  the  amount  due  him,  the  amount 
which  may  have  been  advanced  him,  and  the  balance  due  on  pay  day.  A 
form  of  receipt  should  then  be  issued  to  each  workman  showing  the  amount 
he  is  to  receive,  and  on  his  presenting  this  form,  duly  signed,  at  the  cashier's 
desk  he  will  be  paid. 

There  may  also  be  irregularities  in  making  deposits  in  the  bank,  outside 
of  such  irregularities  as  taking  a  few  hundred  dollars  In  currency  to  deposit 
and  taking  the  train  for  Canada  Instead.  Cases  have  been  known  In  which 
deposits  have  been  short  for  quite  a  lengthy  period  of  time,  the  amount  In 
the  bank  pass-book  being  made  to  agree  with  the  amount  shown  on  the  books 
of  account  by  omitting  one  or  two  entries  towards  the  close  of  the  month 
when  the  balance  Is  taken.  The  only  way  to  detect  such  Intentional  mistakes 
is,  of  course,  to  carefully  compare  the  payments  as  per  cash  book,  or  check 
stub,  with  the  payments  entered  In  the  cash  book  and  to  check  the  balance 
of  cash  on  hand  and  at  bank  as  shown  by  the  cash  book  with  the  actual  cash 
on  hand  at  unexpected  Intervals,  afterwards  depositing  the  whole  amount 
on  hand  In  the  bank,  so  that  there  will  be  an  accurate  basis  for  further  inves- 
tigation If  found  desirable." 

Another  method  of  embezzlement  often  employed  Is  by  paying  Invoices 
of  goods  purchased  twice.  This  can  easily  be  prevented  by  a  good  voucher 

67 


system  by  which  the  bills  to  be  paid  are  all  attached  to  the  voucher,  and  each 
bill  is  stamped  by  the  officer  who  O.  K.'d  them  as  he  reviews  them.  These 
bills  cannot  then  be  brought  before  him  again  because  of  the  endorsement 
upon  them,  and  in  case  a  duplicate  bill  should  be  presented  it  would  be  the 
officers'  duty  to  carefully  investigate  the  matter  before  sanctioning  its  pay- 
ment. 

Every  invoice,  also,  before  being  presented  for  O.  K.  to  the  treasurer, 
should  bear  the  O.  K.  of  the  shipping  clerk,  as  being  received  in  good  order; 
of  the  superintendent  (if  it  is  a  factory)  ;  or  of  the  department  manager 
(if  it  is  a  business  divided  into  departments)  ;  of  the  purchasing  agent  in 
regard  to  price ;  and  of  the  book-keeper  so  far  as  accuracy  of  computation 
is  concerned. 

The  misappropriation  of  cash  sales  occurs  very  frequently  in  business 
houses  where  strict  and  proper  methods  of  precaution  are  not  used.  The 
salesman  may  pocket  the  cash  sale  when  receiving  the  money  from  the 
customer,  or  the  cashier  may  pocket  it  on  receiving  the  money  from  the 
salesman.  The  best  method  of  protecting  the  merchant  from  this  class  of 
fraud  is  to  use  triplicate  cash  sales  tickets,  and  to  advertise  to  every  custom- 
er that  a  receipt  is  given  for  every  sale.  This  practically  compels  the  sales- 
man to  make  out  a  ticket  for  the  customer.  The  salesman  retains  one  of 
the  carbons  and  hands  the  other  to  the  cashier  with  the  money.  In  case  of 
an  investigation  the  salesman's  tickets  and  the  cashier's  tickets  are  com- 
pared.   Both  sets  of  tickets  should  be  numbered  and  filed  away  consecutively. 

The  best  method  to  prevent  defalcations  in  the  keeping  of  petty  cash 
is  to  have  that  duty  performed  by  an  assistant  cashier,  providing  him  with 
a  separate  book  with  which  to  enter  his  transactions.  A  check  should  be 
drawn  to  his  order,  which  he  will  enter  in  the  petty  cash  book  as  a  receipt. 
At  certain  intervals  he  will  account  for  all  moneys  expended  to  someone 
appointed  to  receive  his  report,  and  on  this  account  being  O.  K.'d  he  will 
receive  a  check  for  the  amount  of  his  expenditures  which  will  make  the 
amount  of  cash  in  his  hand  equal  to  the  amount  originally  given  him.  In 
the  general  ledger  an  account  will  be  opened  with  the  petty  cashier,  charg- 
ing him  with  all  checks  for  which  he  is  responsible,  and  crediting  him  with 
the  amount  of  his  expenditures,  the  difference  showing  each  month  the  bal- 
ance he  has  on  hand. 

There  are,  of  course,  a  number  of  other  methods  of  making  intentional 
errors  for  the  purpose  of  concealing  fraud,  but  It  is  impossible  to  attempt  to 
describe  them  all,  and  the  foregoing  may  be  considered  interesting  examples 
which  may  be  useful  reading  to  anyone  whose  duty  it  is  to  supervise  or 
check  up  the  work  of  others. 

68 


The  responsibility  of  the  auditor  for  errors  or  defalcations  unlocated 
has  been  a  matter  of  considerable  discussion,  but  the  general  conclusion 
appears  to  be  that  he  is  not  bound  to  do  more  than  exercise  reasonable  care 
and  skill.  He  does  not  guarantee  that  the  books  correctly  show  the  position 
of  a  company's  affairs,  but  he  does  guarantee  that  his  investigation  has  been 
perfect  to  the  best  of  his  ability  and  that  his  findings  have  been  arrived  at 
in  the  most  careful  and  bona  Ude  manner  possible. 

The  Valuation  of  Assets  on  the  Balance  Sheet. — The  respon- 
sibility of  the  auditor  for  the  values  set  down  in  a  statement  of  assets  and 
liabilities  has  not  yet  been  defined  in  this  country,  and  the  auditor  will, 
as  a  rule,  take  the  values  as  he  finds  them,  incorporating  in  his  report  such 
criticism  and  recommendations  in  regard  to  same  a:s  he  may  think  best. 
This  refers  exclusively  to  an  audit  performed  for  the  purpose  of  verifying 
the  accuracy  of  books  of  account.  Where  an  examination  is  made  for 
intending  purchasers  of  a  business  all  values  must  be  analyzed  in  detail, 
and  only  what  are  considered  to  be  actual  current  values  accepted  of  assets 
known  to  exist  as  represented. 

Market  Values. — The  fluctuation  of  values  affected  by  the  market 
is  a  very  difficult  matter  to  handle  in  most  cases,  but  where  it  appears  rea- 
sonably permanent  the  difference  between  present  and  original  values  should 
be  charged  or  credited  to  profit  and  loss. 

Depreciation. — It  is  the  auditor's  duty  to  see  that  proper  provision 
is  made  for  the  depreciation  of  fixed  assets,  and  that  bad  debts  are  eliminated 
from  the  statement  of  assets.  Whether  he  will  establish  a  reserve  for  bad 
and  doubtful  debts  will  depend  upon  the  general  conditions  of  the  case. 

Charges  for  repairs  should  be  carefully  watched,  as  it  is  quite  usual 
for  merchants  to  treat  them  as  capital  expenditures  instead  of  as  a  charge 
to  revenue  for  maintaining  present  values. 

This  subject  will  be  considered  at  length  under  its  proper  heading. 

Verification  of  Profits. — There  has  been  considerable  discussion 
as  to  the  scope  of  an  accountant's  work  when  engaged  to  verify  the  profits 
of  a  business,  some  maintaining  that  it  does  not  include'an  examination  as 
to  the  accuracy  of  the  books  of  account  from  which  the  profits  are  deter- 
mined. 

The  only  way,  however,  to  verify  a  statement  of  profits  made  is  to 
determine  the  truth  of  the  figures  from  which  such  a  statement  is  compiled, 
i.  e.,  those  figures  which  affect  the  trading,  and  profit  and  loss  accounts. 

With  regard  to  this  important  subject,  which  hinges  so  much  upon  the 
value  of  certain  supposed  assets  which  go  to  make  up  the  alleged  surplus 

69  ' 


shown  by  the  bo®ks,  such  as  accounts  receivable  (either  trade  or  loans),  etc., 
it  may  be  well  to  quote  the  following: 

"It  is  no  part  of  an  auditor's  duty  to  give  advice,  either  to  directors 
or  to  shareholders,  as  to  what  they  ought  to  do.  An  auditor  has  nothing 
to  do  with  the  prudence  or  imprudence  of  making  loans  with  or  without 
security.  It  is  nothing  to  him  whether  the  business  of  a  company  is  being 
conducted  prudently  or  imprudently,  profitably  or  unprofitably.  It  is 
nothing  to  him  whether  dividends  are  properly  or  improperly  declared,  pro- 
vided he  discharges  his  own  duty  to  the  shareholders.  His  business  is  to 
ascertain  and  state  the  true  financial  position  of  the  company  at  the  time 
of  the  audit,  and  his  duty  is  confined  to  that.  But  then  comes  the  question : 
How  is  he  to  ascertain  that  position?  The  answer  is,  by  examining  the 
books  of  the  company.  But  he  does  not  discharge  his  duty  by  doing  this 
without  inquiry  and  without  taking  any  trouble  to  see  that  the  books  them- 
selves show  the  company's  true  position.  He  must  take  reasonable  care 
to  ascertain  that  they  do  so.  Unless  he  does  this,  his  audit  is  worse  than 
an  idle  farce.  Assuming  the  books  to  be  so  kept  as  to  show  the  true  posi- 
tion of  the  company,  the  auditor  has  to  frame  a  balance  sheet  showing  that 
position  according  to  the  books,  and  to  certify  that  the  balance  sheet  pre- 
sented is  correct  in  that  sense.  But  his  first  duty  is  to  examine  the  books, 
not  merely  for  the  purpose  of  ascertaining  what  they  do  show,  but  also  for 
the  purpose  of  satisfying  himself  that  they  show  the  true  financial  position 
of  the  company." 

Unearned  Profits. — It  is  a  part  of  the  auditor's  duty  to  see  that 
no  unearned  profits  on  uncompleted  work,  or  on  sales  booked  for  future 
delivery  are  included  in  the  period  covered  by  the  audit.  One  method  of 
treating  uncompleted  work  is  to  include  the  credit  for  a  completed  contract — 
for  instance — and  to  open  an  account  entitled  "reserve  for  unfinished  con- 
tracts,"— and  charge  to  this  account  the  estimated  cost  to  complete.  This 
applies  only  to  contracts  in  an  advanced  stage. 

Condensed  Auditing  System. — Verify  the  cash  balance  at  date  of 
commencement  of  audit  with  balances  found  in  ledgers.  On  suitably 
ruled  paper  open  accounts  with  all  general  ledger  accounts,  and  adjustment 
accounts  with  customers  and  purchase  ledgers.  Post  up  these  accounts 
from  cash  book  and  cross  entry  journal,  and  post  totals  from  Purchase, 
Sales  and  Credit  journals  to  their  respective  representative  accounts.  Where 
the  books  are  well  kept  and  separate  columns  used  for  the  different  ledgers 
and  for  heavy  posting  accounts  (such  as  cash  sales,  cash  purchases,  expenses, 
etc.)  this  work  is  extremely  simple,  and  easy  to  perform  with  speed  and 
accuracy.^ 

70 


In  a  case  of  very  old  fashioned  book-keeping,  where  everything  is 
jumbled  up  in  one  column  on  the  books  of  original  entry,  it  is  a  more  difficult 
process,  and  necessitates  great  care. 

After  completing  this  auditor's  ledger,  or  abstract,  draw  off  the  balances 
from  same  and  compare  with  the  balances  shown  on  the  book-keeper's  trial 
balance.  Locate  the  source  of  every  difference  and  note  all  errors  found, 
such  as  personal  accounts  charged  to  non-posting  columns,  etc.,  accompany- 
ing same  with  entries  necessary  to  correct.  The  customers'  ledger  balance 
accounts  will  agree  total  sales  and  other  ledger  debits  with  sales  and  cross 
entry  journal,  total  cash  and  other  ledger  credits  with  cash  book  and  credit 
journal,  and  the  resulting  balances  will  agree  with  the  total  of  the  ledger  bal- 
ances as  per  trial  balance.  The  purchase  ledger  balances  will  be  checked  in 
the  same  manner. 

To  obtain  this  comparison^  on  a  sheet  of  suitably  ruled  paper  write  out 
the  following  data: 

From  the  trial  balance  at  commencement  of  audit  the  debit  and  credit 
balances,  taking  sales  and  purchase  accounts  in  totals.  From  the  auditor's 
abstract  ledger  in  adjoining  columns,  the  total  debit  and  credit  postings  for 
the  period  audited.  In  columns  next  adjoining  draw  off  new  trial  balance 
and  agree  with  that  of  the  book-keeper. 

To  the  total  credits  add  cash  on  hand  at  close  of  books.  To  the  debits 
add  cash  on  hand  at  commencement  of  audit.  The  debits  and  credits  will 
then  agree.  Compare  with  total  debits  and  credits  from  cash  and  journals. 
This  will  catch  errors  of  footings,  simple  or  counterbalancing. 

Close  out  accounts  to  profit  and  loss,  and  draw  up  statement  of  assets 
and  liabilities.  Check  footings  of  all  columns  of  cash  book  and  journals 
the  totals  of  which  were  taken  into  the  abstract.  Check  footings  of  pay 
roll  and  compare  with  cash  book.  Check  footings  of  petty  cash  book.  Check 
bills  receivable  book  with  Bills  Receivable  account,  and  verify  inventory  of 
bills  on  hand.  Check  bills  payable  book  with  Bills  Payable  account.  Have 
bank  book  balanced  at  bank,  and  verify  balance  on  hand  at  close  of  books 
after  listing  all  unpaid  checks.  Check  vouchers  for  all  payments  by  cash  or 
check,  and  make  a  list  of  vouchers  not  produced.  Some  auditors  consider 
the  checks  themselves  as  sufficient  vouchers  for  payments  through  bank. 
Call  for  vouchers  for  journal  credits  and  allowances.  Prepare  report  and 
necessary  financial  statements. 

Whenever  possible  the  auditor  should  endeavor  to  satisfy  himself  that 
all  receipts  have  been  entered  in  the  cash  book,  but  it  is  rare  to  find  a 
business  house  possessing  a  record  which  can  be  satisfactorily  checked  or 
that  will  take  the  trouble  to  keep  such  a  record.    Should  it  fall  within  the 

71 


duty  of  the  auditor  to  balance  the  books,  this  is  best  accomplished  by  making 
each  ledger  self-proving  by  means  of  adjustment  accounts. 


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Corporati6n  Auditing. — The  audit  of  the  books  of  a  corporation 
involve  the  examination  and  verification  of  Capital,  Debenture,  and  Dividend 
accounts.  To  accomplish  this,  the  company's  minutes  must  be  perused  and 
their  effect  noted,  and  a  report  made  of  any  variations  therefrom. 

The  corporation  laws  of  the  United  States  do  not,  however,  prescribe 
the  method  of  dealing  with  these  accounts,  and  the  auditor  will  therefpre 
use  his  judgment  in  regard  to  what  he  finds. 

AUDITOR. — An  auditor  may  be  described  as  a  person  whose  duty  it 
is  to  examine  the  accounts  of  a  company,  firm  or  person,  so  as  to  ascertain 
the  exact  state  of  affairs  financially  at  a  given  moment.  This  involves  not 
only  a  scrutiny  of  the  figures,  but  also  an  examination  of  the  form  and 
substance  of  the  accounts,  in  order  to  see  that  they  truly  represent  the  state 
of  affairs  purporting  to  be  represented  by  them.  The  position  of  an 
auditor,  his  rights,  and  liabilities,  depend  very  much  upon  the  circumstances 
under  which,  and  for  the  purpore  of  which,  he  is  appointed.  ' 

Attitude  of  the  Auditor. — The  auditor  to  a  firm  is  usually  api 
pointed  by  the  mutual  agreement  of  the  partners,  but,  occasionally,  by  the 
articles  of  partnership  themselves,  or  by  one  particular  partner.  If  appointed 
auditor  to  the  firm,  he  must,  however,  in  either  case,  consider  each  partner 
as  his  client,  and  protect  the  interests  of  each  accordingly.  The  same  con- 
ditions as  to  terms  of  agreement,  responsibility,  fees,  and  resignation, 
obtain  as  to  the  auditorship  of  firms  as  mentioned  in  the  previous  paragraph; 
but  it  would  seem  that  any  one  partner  would  have  power  to  bind  the  firm 
as  to  the  amount  of  the  fees — except,  perhaps,  where  the  appointment  lay 


72 


in  the  hands  of  one  partner,  when  the  consent  of  such  partner  would  prob- 
ably be  required.  Probably  no  one  partner  could  discharge  an  auditor 
without  the  consent  of  all  his  co-partners. 

The  auditor  of  the  company  is  subject  to  the  rules  and  regulations  of 
that  company,  and  tp  such  further  statutory  provisions  as  may  apply  to  the 
particular  class  of  undertaking.  The  usual  practice  is  for  him  to  be 
appointed,  in  the  case  of  a  new  company,  by  the  directors;  but  he  is  subject 
to  re-election  at  each  successive  annual  general  meeting,  and  at  any  such 
meeting  the  shareholders  may  (theoretically),  if  they  so  please,  appoint 
another  auditor.  Unless  the  remuneration  of  the  auditor  be  fixed  at  the 
time  of  his  appointment,  or  by  the  articles  of  association,  he  is  entitled  to 
a  reasonable  remuneration;  but  if  appointed  "^t  such  remuneration  as  the 
shareholders  may  think  fit,"  he  is  entitled  to  such  sum  as  the  general  meet- 
ing may  award  him — and  no  more.  Directors  have  no  power  to  dismiss 
an  auditor,  once  appointed;  but,  apparently,  an  auditor  may  resign  at  any 
time,  although  probably  at  the  loss  of  his  fees  for  the  uncompleted  work. 
A  casual  vacancy  has  usually  to  be  filled  by  an  appointment  at  an*  extra- 
ordinary general  meeting,  but  many  articles  of  association  give  the  directors 
power  to  fill  casual  vacancy.  To  a  great  extent  it  rests  with  the  directors 
to  decide  how  much  information  shall  be  supplied  in  the  published  accounts ; 
but  the  auditor  must  not  lose  sight  of  his  individual  responsibility,  and  he 
should  never  certify  a  balance  sheet  to  be  "full"  merely  because  he  considers 
it  to  be  as  "full"  as  he  may  think  it  expedient  for  it  to  be.  Rather  let  him, 
in  such  a  case,  certify  the  balance  sheet,  "in  his  opinion  to  be  a  fair  balance 
sheet,  and  to  sufficiently  disclose  the  financial  position  of  the  company."  On 
the  6ther  hand,  he  should  be  particularly  careful  to  guard  against  juggling 
with  words,  and  .so  appearing  to  give  a  full  certificate,  when  in  reality  he 
is  "making  himself  safe,"  or  ^'hedging"  behind  a  certificate  which,  when 
carefully  analyzed  (and  only  then)  is  found  to  be  most  qualified.  He  must, 
in  every  case,  be  satisfied  in  his  own  mind  that  the  accounts  are  correct,  and 
fairly  stated.  ,  ' 

Attitude  of  Proprietors  of  Business. — An  accountant  says :  "Com- 
panies' audits  are  curious  things.  Some  secretaries  and  managers  think 
the  audit  ought  to  be  as  they  think  fit — that  is,  they  and  not  you  should 
say  what  ought  to  be  gone  through.  In  this  case  I  strongly  recommend 
the  auditor  to  go  through  first  what  is  ofifered,  and  afterwards  to  whatever 
he  wants.  Never  be  put  off  by  anything  material.  If  seriously  blocked 
at  any  stage  or  t'lwarted  in  any  way,  look  out  and  pay  more  particular 
attention  to  this  part  of  the  audit  than  any  other."  The  proprietors  of  a 
business  whe4-c  the  books  are  being  audited  are,  however,  pleasant  as  a 

73 


rule,  especially  if  the  work  is  being  done  "on  contract" — that  is,  at  a  speci- 
fied sum  for  the  job.  If,  however,  the  work  is  being  done  at  so  much  per 
diem,  some  proprietors  have  an  unpleasant  habit  of  sneaking  around  the 
auditor  every  ten  minutes  and  surveying  his  work  with  manifest  impatience 
and  displeasure,  after  a  while  asking  him  how  much  longer  he  thinks  the 
audit  is  going  to  take,  and  otherwise  generally  upsetting  his  equanimity. 

Some  proprietors  are  quick  to  take  advantage  of  any  hints  thrown  out 
by  the  accountant  in  regard  to  shorter  and  better  methods  which  might  be 
improved,  and  promptly  give  such  suggestions  a  trial.  Others,  strange  to 
say,  resent  these  suggestions,  although  they  actually  pay  the  accountants 
to  make  them.  Instaipces  have  been  known  when  very  trying  abuses,  which 
greatly  hindered  the  accountant  in  his  work,  and  thereby  made  the  audit 
more  expensive  for  the  merchant,  were  left  uninterfered  with  year  after 
year,  in  spite  of*,  recommendations  for  their  removal  in  each  semi-annual 
report. 

Attitude  of  the  Book-keeper. — In  the  performance  of  his  duties 
the  public  accountant  must  of  necessity  come  into  contact  with  all  kinds  and 
varieties  of  persons,  and  it  naturally  follows  that  some  of  his  experiences 
are  amusing,  and  some  exasperating.  The  demeanor  of  the  book-keeper 
to  the  public  accountant  is  of  itself  an  entertaining  study.  Some  book- 
keepers maintain  an  impressive  and  haughty  dignity  with  a  view  to  impress- 
ing upon  the  accountant  the  fact  that  he,  the  book-keeper,  considers  himself 
^  not  only  as  good  as  the  accountant,  but  a  great  deal  better,  and  that  if  he, 
the  book-keeper,  must  suffer  the  outrage  of  the  accountant's  contiguity, 
he  does  it  under  protest.  Some  book-keepers,  on  the  other  hand,  are 
extremely  agreeable,  and  even  endeavor  to  be  as  "chummy"  as  possible  with 
the  accountant,  as  by  this  method  they  expect  to  touch  the  soft  spot  which 
can  always  be  found  in  the  heart  of  a  human  being,  and  thus  obtain  a  favor- 
able report  in  regard  to  their  abilities  and  the  way  in  which  the  work  has 
been  performed. 

Some  book-keepers  are  morose,  savage,  and  act  as  though  the  exam- 
ination conducted  by  the  accountant  was  an  insufferable  insult  which  could 
never  be  forgiven.  The  accountant  generally  manages  in  some  way  to  help 
improve  the  prospects  of  such  a  book-keeper  as  a  return  for  his  amiability. 

Auditors'  Assistants. — Reliability  is  the  first  requisite  in  an  auditor's 
assistant,  and  those  who  wish  to  do  well  in  this  profession  must,  above  all 
things,  obtain  a  reputation  for  being  tenacious  of  the  secrets  of  their  busi- 
ness. The  accountant's  assistant  should  be  careful  not  to  accept  the  friendly 
advances  of  the  employers'  book-keeper  or  other  clerks  with  whom  he  may 
have  to  do,  as  in  case  condemnatory  reports  have  to  be  made,  he  may  other- 

74 


wise  find  himself  in  an  uncomfortable  position.  Owing  to  the  difficulty  in 
obtaining  experienced  assistants  in  this  country,  the  public  accountant  is 
frequently  compelled  to  suffer  many  annoying  experiences.  One  difficulty 
which  appears  to  be  almost  omnipresent  is  getting  the  detail  work  of  an 
audit  done  in  such  a  neat  and  orderly  manner  that,  should  the  assistant 
die  in  the  midst  of  an  audit,  or  suffer  any  other  calamity  whereby  he  may  be 
prevented  from  completing  the  work,  someone  else  may  take  it  up  at  the 
point  of  breakage  and  intelligently « complete  it,  without  having  to  do  all 
the  work  over  again.  The  average  assistant,  when  he  comes  to  any  dif- 
ficulty, will  generally  make  a  note  on  some  small  slip  of  paper,  with  an 
intention  of  referring*  to  it  at  some  time  hereafter.  He  also  generally  car- 
ries these  small  slips  around  with  him  in  his  pockets.  When  he  quits  the 
work  it  never  occurs  to  him  that  the  contents  of  these  slips  will  be  unknown 
to  his  successor,  and  if  that  successor  takes  up  the  work  where  "number  one" 
left  off,  and  carries  it  out  until  its  completion,  he  will  consequently  find 
himself  involved  in  an  almost  inextricable  tangle,  the  straightening  out  of 
which  will  be  extremely  annoying  and  expensive. 

Another  curious  trait  of  accountants'  assistants  is  that  a  great  many 
of  them  cannot  on  any  account  be  persuaded,  induced  or  cajoled  into  obey- 
ing instructions,  and  this  is  frequently  true  of  really  good  men.  You  may 
order  them  to  follow  certain  lines  in  their  work  and  to  adopt  certain  methods, 
but  in  the  end  it  is  usually  found  that  they  have  done  the  work  in  some  other 
way  (their  own  way),  which  they  describe  to  you  as  having  been  found  by 
them  to  be  much  simpler  and  speedier  in  this  particular  case. 

AUDITORS'  CERTIFICATES.— Many  forms  of  certificates  have 
been  used  by  auditors,  and  we  attach  some  of  the  best  known.  It  should 
be  borne  in  mind  that  the  auditor  is  not  required  to  make  himself  respon- 
sible for  errors  or  defalcations  which  have  escaped  his  notice  after  a*  faithful 
and  conscientious  examination. 

Forms  of  Certificates. — "I  hereby  certify  that  I  have  carefully  ex- 
amined the  books  of  account  of  Tames  Reid  &  Co.  with  the  vouchers  pro- 
duced, and  that  the  above  balance  sheet  (or  statement  of  assets  and  liabili- 
ties) is  a  true  and  correct  statement  of  the  present  condition  of  the  business 
as  on  the  31st  day  of  December,  1899,  as  disclosed  by  said  books  of  account. 

Dated  this  8th  day  of  January,  1901. 

(Sigfnature.) 


Certified  Public  Accountant." 
75 


"I  have  audited  the  above  Balance-Sheet  (or  the  Company's  Balance- 

Sheet  dated  the day  of ) ,  and  in  my  opinion 

such  Balance-Sheet  is  properly  drawn  up,  so  as  to  exhibit  a  true  and  correct 
view  of  the  state  of  the  Company's  affairs  as  shown  by  the  Books  of  the 
Company.'* 


"We  hereby  certify  that  we  have  thoroughly  audited  these  accounts 
for  the  (year)  ended  (25th  March)  last,  and  that  the  same  appear  to  be 
correct.  We  further  certify  that  the  above  Balance-Sheet  is  in  accordance 
with  the  books,  and  appears  to  us  to  be  a  correct  statement  of  the  financial 
position  of  the  firm,  as  it  appeared  on  the  above  date." 


CX<'cX3Vd 


76 


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Magazine 

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quarter-sawed  white  oak 
—  measures  14  x  9  — big 
enough  to  accommodate  the 
largest  letter-head — completely 
indexed  by  day,  month  and  al- 
phabet. Every  tab  is  re-in- 
forced  with  leather.  The  com- 
leather.    It's    not    a  toy,  but  a 


DO  NOT  LET  A  MEMORY  STUNT 
REGULATE  YOUR   DAY^S   WORK 

C  Do  Not  Scatter  Yoof  Brains  Through  Ten  or  Twelve  Pigeon  Holes — 
A  Dozen  Drawers — Two  or  Three  Note  Books  —  Or  over  a  Quantity 
of  other  Paraphernalia. 

Ct.  There  is  a  simple  way  to  concentrate  your  work  into  a  compact  and  easily 
accessible  form.    There  is  a  certain^  sure  method  of  planning  your  day's  work. 


You  need  a  personal  desk  system.  There  should  be  a  definite  place  for  everything  that  comes 
to  your  desk.  You  must  have  a  way  to  carry  over  your  unfinished  work — business  that  requires 
attention  at  some  future  time.  Keep  the  details  of  your  own  work  always  at  your  fingertips. 
The  silent  secretary  as  we  call  it,  or  the  business  watch-dog  as  one  user  puts  it,  takes 
absolute  care  of  the  petty  details  of  your  daily  routine  work.  It  provides  the  means  of  ^r  / 
keeping  everything  that  you  wish  to  preserve,  always  at  your  elbow.  It  lays  out  your 
plan  of  action — it  automatically  reminds  you  of  your  appointments  and  engage- 
ments; it  calls  your  attention  to  collections  due,  prospective  orders  that  need  X^- 
attention;  it's  a  sort  of  mechanical  memory — an  automatic  collector,  salesman,  ^^/ 
correspondent.  It's  the  prod  for  the  forgetter — the  office  alarm  clock — the  ^^/ 
safety  valve  of  the  over-burdened  pigeon-hole.  .^^■■''.^ 


There's  Money  in  The  Business  Man's  Magazine 

THE  PROOF  IS  IN  THE  READING 


/^f^r 


Every  page  is  crammed  with  it.    A  little  pressure — brain 
pressure — will   force    it    out.      There  is    no  easy-money 
schemes  described  in  it;  no  royal  road  to  wealth.     It 
deals  with   legitimate  plans  that  you   can   adapt  to 
your  work.    Ideas  that  mean  money  to  you. 


^-' 


■o     -A' 


/ 


ment  that  it  does  not  explain  clearly  and 

C  This  book  is  not  the  work  of  one  indi- 
experts— men  especially  fitted  to  write  on 

Ct.  Such  men  as  J.  H.  Jeffries,  Vice-president  of 
W.  G.  Schweppe,  Manager  of  the  American  Credit 
of  others  give  you  in  cold,  hard  type,  the  boiled 
A  half  hour's  conversation  with  any  of  the  con- 
times  the  cost  of  the  book  to  any  credit 
densed  credit  and  collection  information  given  in 

C  Think  what  it  means  to  get  every  statement, 
sected  for  your  benefit  by  the  very  men  who  use 
handling  millions  of  dollars  worth  of  credits  every 

O.  We  cannot  begin  to  tell  you  all  this  valuable  book 

the  opportunity  of  examining  it  at  our  expense.     We 

will  be  glad  to  send  it  to  you  on  approval  if  you  act  today^ 

Send  in  the  coupon  now. 

C  This  book  contains  over  three  hundred  twenty-five  pages 
of  reading  matter.  The  salient  points  of  credit  work  are  con- 
clusively brought  out  by  dividing  the  book  into  twenty-five 
separate  and  distinct  chapters.  Each  particular  subject  is 
handled  by  a  man  competent  to  write  authoritatively  on  the 
subject.  Not  only  is  there  value  in  the  book,  but  it  looks  its 
worth.  It  is  handsomely  bound  in  three-quarter  Morocco, 
full  Russia  back,  is  gold  stamped  and  gold  edge.  Remember 
your  money  back  if  you  do  not  find  it  is  the  best  investment 
you  ever  made. 


How^  mucK  of  your 
Money  is  tied  up 
in  Bad  Debts? 

€L  Better  than  ways  of  pounding  money  out  of 
bad  debts  are  methods,  systems  and  credit 
plans  for  preventing  live  accounts  going  into 
the  black  book  list.  Every  time  you  place  a 
customer  in  the  position  of  h^mg  forced  \q  pay, 

you  stand  the  chance  of  losing  sales  and 

making  enemies. 

The  Credit  Man 
and  his  .work 

Not   only  shows  what    are  the   needs  of  a  credit 
department— what  are  the  essential  characteristics  of 
a  successful  credit  expert— it  not  only  points  out  the 
defects  in  existing  systems,  but  it  actually  describes 
in  minute  detail  the  best  credit  systems  in  operation 
anywhere.     It  shows,  too,  how  to  force  a  settlement 
when  other  means  fail.     There  is  nothing  pertain- 
ing to  the  successful  operation  of  a  credit  depart- 
completely. 

vidual,  but  of  a  corps  of  trained  business 
this  particular  subject. 

the  National  Credit  Men's  Association, 
Indemnity  Insurance  Company  and  dozens 
down  essence  of  their  years  of  experience, 
tributors  to  this  work  is  worth  ten 
man.  Think  what  it  means  to  get  the  con- 
The  Credit  iVian  and  his  Work! 

every  plan,  every  idea  analyzed  and  dis- 
these  same  systems  and  methods  in 
year. 

can  do  for  you,  but  we  will  give  you 


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methods,  there  is  something  wrong  with  your  advertising.  You  are  lacking  in  schemes  and  ideas  to  create 
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A  COMMON  SENSE  OFFER 

HOW  TO  GET  A  HANDSOMELY  BOUND 

UP-TO-DATE  DICTIONARY  OF  THE  ENGLISH  LANGUAGE  IN  CONNECTION 

WITH  YOUR  SUBSCRIPTION 

C  A  complete  and  reliable  volume  for  every-day  use,  comprising  the  pronunciation  and  definition  of  every 
practical  word — new  and  old— in  the  language.  Only  words  that  should  invariably  begin  with  a  capital  are  so  printed. 
C  The  Twentieth  Century  Dictionary  is  abundantly  illustrated,  both  in  the  text  and  in  full  page  groupings. 
More  than  twelve  hundred  pictures  are  utilized  in  the  work,  among  which  may  be  found  all  of  the  new  inven- 
tions; such  as  the  Graphaphone,  X-Ray,  Linotype,  Megophone,  etc.  Also  a  full  page  group  of  pictures  of  sport- 
ing implements,  showing  the  different  goll  clubs,  polo  clubs,  lacrosse  racquets,  curlers,  quoits,  etc.  Pictures  of 
the  tools  of  many  of  the  handicrafts  are  likewise  grouped  on  one  page,  ahd  there  are  two  pages  illustrating  the 
State  Seals.    Supplemented   by  fifty  pages  of  condensed  every-day  helps  and  a 

TWENTY-SEVEN  PAGE  GAZETTEER  OF  THE  WORLD 

FOR    A    FRONTISPIECE  THE    DICTIONARY  CONTAINS  THE   FLAGS   OF  ALL    NATIONS    IN   COLORS 


SUPPLEMENTARY 
MATTER 


Foreign  Words  and  Phrases 
Alphabetical  List  of  AbbreTiations 
Christian    Names    and    their  Sig< 

niflcatious 
Weights  and  Heasnres 
Forms  and   Address 
Legai  and  Loeai  Hoiidays 
Postage  and  Postai  Information 
How  to  Secure  a  Copyright 
How  to  Secure  a  Patent 
Ruies  for  Punetuation  and  Capi* 

taiization 
Facts  Abont  the  President! 
State    Statistics   and   Interesting 

Facts 
State  Seals 
Fopniar  Sobriqaets  of  Cities  and 

Loeaiities 
Deriratlon  of  Geographies!  Names 
How  to  Write  a  Letter 
Formal  Letters 
Business  Forms 
Common  Errors  in  Spelling  and 

Writing 
Parliamentary  Rnles  of  Order 
Business  Terms  Delned 
Hythologicai  and  Classical  Names 
Declaration  of  Independence 
Constitution  of  the  United  States 


Twentieth? 


EXAMPLES  OF  SOME  OP 
THE  NEW  WORDS 


RADIUn 

ACETYLENE 
KHAKI 

aerograh 

LYDUITE 
ANTITOXIN 
COHERER 
VOLT 
BENZOZONE 
HALF-TONE 
BOYCOTT 
APPENDICITIS 
BOLO 
KOPJE 

MERCERIZED 
LINOTYPE 
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TREK 
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PING-PONG 
ACTOnOBILE 
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CINE1HAT06RAPH 
GRAPHOPHONB 


C  The  most  modern  dictionary  published,  answering  every  practical  purpose  of  the  home,  school,  office  or  work- 
shop. Handy  in  size;  concise  in  contents;  completely  and  well-illustrated;  universal  in  vocabulary;  encyclopedic 
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TELLS  you  in  a  tangible,  graphic  way  how  to  increase  your  sell- 
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C  Think  of  it!     Over  two  hundred  and  fifty  pages  of  boiled-down  money-producing,  money-earning 

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benefit  of  their  years  of  experience  in  the  selling  world. 

C  SALES  PROMOTION  is  the  finger-post  that  points  the  way  on  the  road  to  success.     SALES  PROMOTION 

has  more  reason  for  being  than  any  other  business  book  ever  published.     Your  very  welfare  hangs  on  the  one 
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Learn  from  the  ex- 


word  SALES 

the  very  highest  point  of  efficiency  every  latent  spark  of  selling  power  that  you  possess 

perience  of  others  to  avoid  the  pitfalls  that  lie  in  your  path. 

C  If  you  are  a  sales  manager,  learn  how  the  greatest  sales  organizations— selling  powers  that  make  their  influence 
felt  on  every  hand— spend  hundreds  and  even  thousands  of  dollars  on  a  man,  coaching  him  and  drilling  him  in  the 
essential  features  of  his  work  before  he  is  ever  put  out  into  a  territory.  Absorb  the  methods  and  plans  of  suc- 
cessful sales  managers.  Make  it  a  study  to  help  the  man  in  the  field  with  tactful,  diplomatic  letters  that  win.  Let 
SALES  PROMOTION  show  you  how  to  inject  all  the  live  personality  possible  into  your  business  correspondence. 

C  Mr.  Speer  has  done  for  SALES  PROMOTION,  what  no  author  of  any  similar  work  has  ever  done.  He  has  not 
only  covered  the  established  methods  of  personal  and  mail-order  organizations,  but  he  has  also  shown  the  proper 
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Manufacturing  Cost 

is  the  subject  of  greatest  interest 
to  every  manufacturer.  He  wants 
to  know  what  it  costs  to  make  his 
goods,  and  he  wants  a  system  of 
cost  finding  that  will  give  accur- 
ate results  with  as  little  labor  as 
possible. 

"Manufacturing 
Cost" 

has  been  written  for  the  man  in 

the  factory  who  wishes  to  devise 

a  system  of  cost  finding  suited  to 

his  own  requirements.     It  is  not 

a  description  of  the  systems  used 

in  some  particular  concerns,  but 

it  tells  how  to  organize  a  simple, 

efficient  cost  finding  system  for  any  factory.     Manufacturing  cost  was 

selected  as  a  text  book  by  the  International  Accountants'  Society,  Inc., 

after  examining  every  book  published  on  the  subject  because  it  teaches 

the  principles  underlying  a  successful  system  of  cost  finding. 

Among  the  subjects  treated  in  this  little  book  are  "Organization" 
(being  a  discussion  of  the  proper  organization  of  the  factory)  ;  ''Cost 
Accounts  and  General  Accounts,"  "Store  Room"  "Tool  Room,"  "Pat- 
tern Shop,"  "Labor  and  Its  Records,"  "Mechanical  Devices"  and  a 
complete  "Time  Record  and  Pay-Roll  System." 

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Practice" $3.00 

<i!»Ianufacturingr  Cost"  2.00 

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IS  YOUR  WORK  A  DAILY  GRIND? 


A  FEW  THINGS  FOR  THE  BOOK-KEEPER 
TO  CONSIDER 

C  Do  you  know  all  that  can  be  learned  about  the  new  and  up-to-date  methods 
of  accounting?  Are  you  familiar  with  the  ins  and  outs  of  card  systems  and 
loose-leaf  methods?  Don't  you  often  wish  that  you  could  work  in  an  hour  or  two  some- 
where to  do  something  else?  That  something  else  may  be  the  thing  that  will  make  you 
and  your  firm  more  money.  But  you  haven't  the  time  and  like  a  will-o-the-wisp,  that 
something  else  keeps  just  out  of  your  reach. 

C  Don't  let  the  petty  details  of  your  work  crowd  out  the  money  making  ideas  and  plans, 

which  you  could  perfect  if  you  had  more  time.     Don't  let  yourself  become  a  mere  machine, 

grinding  out  a  daily  grist  of  statements,  invoices,  reports   and  checks.     Simplify  your 

work.    Eliminate  red  tape.    Minimize  detail — adopt  all  the  time-savers  and  short-cuts  you  can — make 

detail  your  servant,  not  your  master. 

O.  Just  because  you  are  a  book-keeper  of  perhaps  ten  or  fifteen  years  standing  is  the  very  reason  why 
Thome's  book  will  help  you.  Send  for  a  copy  and  see  if  you  have  fallen  in  a  rut.  Study  it  and  if  you 
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THE  AMBITIOUS  CLERK— 

stenographer  or«office  boy,  will  gladly  welcome  such  an  exceptional  opportunity  to  become  a  practical, 
competent  book-keeper  at  such  a  nominal  expense.  How  many  of  us  have  gained  the  same  knowledge 
only  by  stealing  a  few  hours  from  rest,  night  after  night,  in  a  crowded  class  room.  Even  then  we 
thought  ourselves  well  repaid  if  we  finally  did  grasp  the  subject.  And  the  price  was  ten  times  the  cost 
of  Thome's  book. 

THORNE'S  BOOK 

WILL  TEACH  YOU  BOOK-KEEPINQ  IN  YOUR  LEISURE  HOURS 

C  The  time  you  spend  going  to  and  from  work  may  be  profitably  employed.  You  are  not  limited  as  to 
the  time  you  may  take  to  complete  the  course.  There  is  no  class-room  theory  injected  into  your  studies. 
Every  line  of  instruction  is  practical,  written  by  a  practical  business  man  in  a  clear  and  business-like 
way.  Don't  be  content  to  remain  in  your  present  position.  Take  advantage  of  this  opportunity  to 
better  yourself.    You  risk  notliing  because  we  guarantee  to  return  your  money  if  you  are  not  satisfied. 

ONE  LAST  WORD 
TO  THE  EMPLOYER— THE  EXECUTIVE— THE  MANAGER 

C  What  would  you  think  of  a  ship-captain  who  could  not  jump  in  on  emergency  and  personally  do 

any  of  the  work  on  board  ship?    Would  you  feel  like  trusting  your  life  to  his  care  if  you  Icnew  he  left 

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if  necessary?     Isn't  it  team  work — directed  by  a  master  mind  and  hand 

that  brings  many  a  ship  safely  out  of  storms  that  seem  impossible. 

C  Your  business  is  nothing  more  than  a  ship,  buffeted  around  on  the 

sea  of  competition,  trade  conditions  and  other  favorable  or  unfavorable 

influences.    If  you  are  an  employer — be  master  of  your  ship,  lay  your 

own  course  and  be  able  to  take  the  wheel  anywhere  and  any  time.     If 

you  are  a  manager — your  position  is    the  same  in  reference  to  your 

department.    Don't  rely  on  others,  know  and  be  able  to  do  for  yourself. 


BOOK-KEEPER  PUBLISHING  CO..  Ltd. 
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A  PRACTICAL  SYSTEM  HAND  BOOK 


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SelUng  Systems 
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Accounting  Systems 
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(JHY  do  you  work  overtime?  Your  boss  don't  care  how  hard  you  work.  He 
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Contains  solutions  of  thousands  of  business 
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commercial  experience. 

Averaging  Accounts 50 

The  book-keeper  will  be  glad  to  have  this 
book  in  his  library  when  called  on  for  com- 
plicated equations. 

Checking  or  Proof  Systems 

The    Detroit    Book-keeper's    Balance 

System 50 

How  to  do  Without  a  Trial  Balance 50 

All  kinds  of  methods  of  proving  work  on  ac- 
count books  are  explained  and  illustrated  in 
these  two  text  books. 

Auditing 

Duties  and  Procedure  of  Auditors 50 

A  valuable  treatise  on  the  work  required  of 
accountants  In  cases  of  Amalgamation  or  Con- 
solidation of  Corporations. 

Science  and  Practice  of  Auditing 1.00 


Total  Value.  $30.00 


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